Big Business

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Big Business

• American History
• Chapter 5 Section 3

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The Law of Supply

• A law stating that as the price of a good
  increases, the quantity supplied of the good
  increases, and as the price of a good decreases,
  the quantity supplied of the good decreases.
• It easier understood that as the price goes up
  the less people demand it, and therefore the
  business will produce less.
• Businesses do not benefit from having extra
  goods on the shelf or in a warehousethey need to
  have their goods sold at the highest price they
  can.

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Supply and Demand Chart
Supply
Demand
P R I C E
250

• A shortage occurs when the amt demanded is more
  than the amt supplied
• A surplus occurs when the amt supplied is
  greater than the amt demanded

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Equilibrium Price When the quantity demanded
the quantity supplied with neither a surplus or
shortage
150

• The equilibrium price will fall with an increase
  in demand with no increase in supply or an
  increase in supply
• The Eq. price will rise with a decrease in
  supply or an increase in demand.

100
50
1 2 3 4 5
6 7
Quantity (thousands of TVs produced)
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Business Cycle

• A business cycle is a series of events that
  occurs within a business throughout the course of
  time. Its book definition is Recurrent swings
  (up and down) in real GDP.
• The events of the cycle include The Peak, the
  Contraction, the Trough, and the Recovery.
• These events may take years to occur, or they
  may all occur throughout one years time.

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• Business Cycle
• Toys R Us Example
• Toys are not in high demand during all times of
  the year, so Toys R Us may experience a business
  cycle that looks like this

Peak Nov, Dec, Jan
Contraction Feb, Mar, Apr
Recovery Aug, Sept, Oct
Trough May, June, July
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Business Cycle I pod Example Some businesses may
not hit a trough every yearthey are a hot
item. But sooner or later the item will fizzle
out, or be replaced by a new one.
Peak 2 after Modification
Peak
Contraction due to over supply, or loss of demand
Contraction due to Competitors Imitation
Introduction of Item
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The Rise of Big Business

• Big Business dominated America in the early 1900s
  - - due to the corporation.
• Corporation owned by many people, but treated
  by law as if it were a person. It can own
  property, pay taxes, make contracts, sue and be
  sued.
• People that own the corporation own stock (called
  stockholders).
• Issuing stock allows corporations to raise large
  amounts of money while spreading out financial
  risk.

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• With the raised from the sale of stock,
  corporations invested in new technologies making
  production more efficient.
• The cost per item of production can be decreased
  by producing goods quickly in large amounts.
• Businesses have 2 costs fixed and operating.
• Fixed company pays whether working or not
  (loans, mortgages, taxes, etc.)
• Operating costs that occur when running the
  company (electricity, wages, supplies, etc.)
• Before the C.W. small businesses had low fixed,
  but high operating costs. With the efficiency of
  the technology, big business had high fixed costs
  but relatively low operating costs.
• This gave Big Business an advantageproduce goods
  less expensively and therefore sell them cheaper
  drive out the competition.

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Consolidating Industry

• Competition led to the fall of prices and cut
  into the profits of the big business. In order to
  maintain their profits, businesses formed pools -
  - agreements to keep prices at certain levels.
  Pools did not last long, somebody always tried to
  undercut the marketalso companies that pooled
  were not protected by the courts.
• Andrew Carnegie - - a pioneer in the big business
  time. Worked to serve the railroad industry. Also
  bought companies that would help his company out.
  This consolidation was called Vertical
  Integration.

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Vertical Integration - Carnegie
Integrated Steel Company
Steel Mill
Shipping
Iron Mine
Limestone
Coal Mine
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Horizontal Integration - Rockefeller
Integrated Steel Company
Independent Steel Mills
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Rockefeller

• Bought oil refiners in PA once oil was found
  there.
• He started to buy out his competitonby 1880
  Standard Oil owned 90 of the oil-refining
  industry in the U.S.
• When a single company achieves control of an
  entire market, it becomes a monopoly.
• Many people were scared of monopolies, so they
  passed laws making them illegal.
• The Standard Oil Company got around these laws by
  establishing trusts allows one person to manage
  another persons property.

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• New Jersey passed a law allowing companies to own
  stock in other companies this led to the
  development of holding companies.
• A holding company does not produce anything, it
  owns the stock of companies that produce things -
  - manage the companies it owns and effectively
  merges them into one large enterprise.
• The creation of holding companies then led the
  way for investment banking headed up by J.P.
  Morgan (merged Carnegie steel with other steel
  companies and created the first billion dollar
  company). Bankers got the stock from the
  companies at a discount and then sold the stock
  for a profit.