Types of Business Entity: Australia Corporations Act 2001

Sole Proprietorship
A Sole Proprietorship represents a form of business that has a single owner (called the proprietorship). From a legal perspective there is no distinction between the owner and the business. However, from an accounting perspective we distinguish clearly between the owner and the business.

The main features are:

• No separate legal entity.
• Limited life.
• Unlimited liability.
• Minimum reporting regulations (compared to other entities).
• Limited access to funds.
• Low establishment costs.

Advantages:

• It is easy to organize and needs only a small amount of capital.
• Minimal financial reporting requirements.
• Quick decision making.
• Combination of ownership and management.

Disadvantages:

• Unlimited liability, in credit actions. 
• Personal property may be tied in the debt if creditors recall. 
• On the death of the owner, continuation is difficult. 
• Limited resources. 

Partnerships

A partnership may be described as the relationship existing between two or more persons carrying on a business with the aim of generating financial profit. The relationship may be established by a formal partnership agreement or an informal arrangement between the parties, or it may be inferred by the actions of two or more individuals. 

The partnership maintains records of each individual partners transactions according to resource contribution, resource withdrawals, or share of undistributed profits. 

The main features are:

• No separate legal entity.
• Limited life.
• Unlimited liability. 
• Mutual agency. 
• Co-ownership of assets and profits. 
• Limited memberships (the number of partners).
• Increased Regulation (Partnerships Acts). 

Partnership agreements are in place and have a detailed and formal agreement so that most potential problems can be avoided. Issues not covered by the agreement are generally covered by law. Such legal rules are equal shares, and no entitlement of a partner to a salary or wage. 

Company
A company is an association or collection of individuals people or "warm-bodies" or else contrived "legal persons" (or a mixture of both). Company members share a common purpose and unite in order to focus their various talents and organize their collectively availableskills or resources to achieve specific, declared goals.

Ownership interest is broken down into 'shares' hence 'shareholders' to describe the owners who have invested. 

The main features are:

• Separate legal entity.
• Unlimited life.
• Limited liability. 
• Company ownership of assets.
• Profits belong to shareholders.
• Extensive membership (think Telstra shareholders).
• Separation of ownership and management. 
• Extensive regulation. 

Company advantages:

• Separation of ownership and management. 
• Perpetual existence.
• Separate legal entity. 
• Limited liability of the owners. 
• Greater access to ownership funding. 
• Potentially greater access to debt funding. 
• Potential tax advantages. 
• Potential increases in share values when listed on the ASX.

Company disadvantages:

• Extensive regulation. 
• Higher establishment costs. 
• Subject to more public scrutiny. 
• Owners not able to watch everything.
• Pressure for short term performance. 
• Loss or dilution of original ownership. 
• Income tax paid on every dollar earned. No tax-free threshold. 

Money Trees, and their effect on inflation

An introduction to inflation

Inflation has the effect of increasing the level of prices for goods and services over time. One benefit of inflation is that the government don't have to worry about those large loans they took out years ago, because that $100k has become easy to get hold of.  

Economists generally agree that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply. Negative effects of inflation include an increase in the cost of holding money, uncertainty over future inflation which may discourage investment and savings, and if inflation is rapid enough, there will be a shortage of goods, prices may change on a daily basis. Positive effects include ensuring that central banks can adjust their real interest rates, making debt cheaper, and encouraging investment in non-monetary capital projects. 

Inflation is the rate of increase in the general price level, so a 10% inflation rate means prices overall are 10% higher than a year ago. One example would be post war Germany. 

After world war 1 german was ordered to repay all the debts they had accumulated in funding the war machine. By November 1923, the American dollar was worth 4,210,500,000,000 German marks. Because war reparations were required to be repaid in hard currency and not the rapidly depreciating Papiermark, one strategy Germany employed was the mass printing of bank notes to buy foreign currency which was in turn used to pay reparations, greatly exacerbating inflation rates of the mark. 

Today the popular way to cause inflation is to get the Central Bank such as the United States Federal Reserve or the Bank of England to hike up interest rates thus promoting savings and reducing the velocity of the money (how quickly it changes hand)and thus prices. This could have the adverse effect that as many people have debts, their expenditure increases with a interest rate rise, yet their cutting out of unnecessary items still doesnt meet the usurious rates, so the wages have upward pressure applied and this would fuel inflation itself.

At one time there was the 'gold standard' in practice in many countries. This is where the price of money is linked directly to the gold it is worth, in effect the Federal Reserve technically would have to keep the gold equivalent to the cash in circulation. During the Great Depression every major currency abandoned the gold standard. The earliest to do so was the Bank of England in 1931 as speculators demanded gold in exchange for currency, threatening the solvency of the British monetary system. This pattern repeated throughout Europe and North America. In the United States, the Federal Reserve was forced to raise interest rates in order to protect the gold standard for the US dollar, worsening already severe domestic economic pressures.

Today most currencies adhere to the fiat system (latin for let it be) which means the cash is unbacked by any physical asset. A holder of a federal reserve note has no right to demand an asset such as gold or silver from the government in exchange for a note. Consequently, some proponents of the theory of value believe that the near-zero marginal cost of production of the current fiat dollar detracts from its attractiveness as a medium of exchange and store of value because a fiat currency without a marginal cost of production is easier to debase via overproduction and the subsequent inflation of the money supply.

The inflation rate is widely calculated by calculating the movement or change in a price index. The consumer price index measures movements in prices of a fixed basket of goods and services purchased by a "typical consumer". The inflation rate is the percentage rate of change of a price index over time. The Retail Price Index is the term of measure in the UK. It is broader than the CPI and contains a larger basket of goods and services. The one thing that remains the same is the amount you can work in a day, so a persons time is the only certainty in the prices of items.

Most countries' central banks will try to sustain an inflation rate of 2-3%.

Everyday Economics Entertainment: Economics Books Recommended Reading (possibly fun)

In reality economics is about us. This concept makes approaching a complex topic like economics a little less intimidating, surely? Economics becomes less about confusing charts and graphs and more about how we wish to order our lives and build our society. I used this theory to start my study into economics and so far it has proved very useful.

As we wrestle with tough questions regarding faith and economics, it’s helpful to have an understanding of basic economic facts.

For those just beginning to wade into the waters of economic thought here is a list of books that will help initiate that interest and the individual begin to grasp the important concepts. These books by no means represent a single small portion of the total books on economics. But here are some of the lighter ones:

• Basic Economics – A suitable primer for everyday people that explains the basics behind any type of economy.

• Economics in One Lesson – As the book bills itself, it’s one of the shortest, surest ways to understand basic economics.

• The Economics Book (Hardback) From Aristotle and Thomas Aquinas, to Adam Smith and John Maynard Keynes, to the top economic thought leaders of today, this is an essential reference for students and anyone else with an interest in how economies work.

• Freakenomics - What do estate agents and the Ku Klux Klan have in common? Why do drug dealers live with their mothers? What do schoolteachers and sumo wrestlers have in common? How can your name affect how well you do in life? This title shows you a totally new way of seeing the world.

• The Undercover Economist - A brilliant and eye-opening explanation of the economics of everyday life - Britain's answer to FREAKONOMICS

• Economics for dummies - It pains me to suggest this book, but if you know nothing about Economics and would like to know more, then the ‘for dummies’ series may be your best bet, for inculcating yourself with the ideas and theory of economics - the book is called, inevitably, Economics for Dummies by Sean Masaki Flynn. Read and let the initiation to the money world start.

• The world is flat- A brand new look at all things is one of the reasons behind the tremendous success of the Thomas L. Friedman authored book The World is Flat: A Brief History of the Twenty-first Century. The book talks about all the things that has led to the ‘flattening’ up of the world; right from the coming of the Gutenberg Press, the industrial revolution to the advent of open source software, online knowledge sources like Wikipedia, blogging and communication sharing mediums like YouTube and podcasting. 

• The argumentative indian - Amartya Sen’s book The Argumentative Indian. The book is not strictly about economics. It is about Indian culture, history and identity. The book also talks about the success of Indian democracy, India’s wide social and economic inequalities and where India stands in the world today.

• Spin-Free Economics - A straightforward guide to major economic policy debates.

• Thinking Strategically: The Competitive Edge in Business, Politics, and Everyday Life - This introduction to game theory discusses how all people—from corporate executives to criminals under arrest—should and do make strategic decisions.

Please comment if you have some suggested reading. 

Production Possibility Frontier (or Curve)

In micro-economics, a production–possibility frontier (PPF), sometimes called a production–possibility curve, production-possibility boundary or product transformation curve, is a graph that shows the various combinations of amounts of two commodities that could be produced using the same fixed total amount of each of the factors of production. 

The amount capable of being produced is limited by factors such as natural resources, time, or capital. 

Graphically bounding the production set for fixed input quantities, the PPF curve shows the maximum possible production level of one commodity for any given production level of the other, given the existing state of technology. The aim is to show the amount or one commodity capable of being produced against another. 

Efficiency- A PPF shows it takes the form of the curve on the right. For an economy to increase the quantity of one good produced, production of the other good must be sacrificed. Fruit picking: Say if you had a limited number of workers, time, and capital resources (ladders to pick the fruit) the number of oranges able to be picked must be sacrificed in order to pick more apples. The same applies the other way round, if you wish to pick more apples in the day, then the number of oranges picked must drop. PPFs represent how much of the latter must be sacrificed for a given increase in production of the former. 

Product A in the graph above (taken from investopedia) can be Oranges, Product B can be apples. Points A, B and C represent the points at which production of Good A and Good B is most efficient. Point X demonstrates the point at which resources are not being used efficiently in the production of both goods; point Y demonstrates an output that is not attainable with the given inputs (time, people, capital). 

Opportunity Cost- In the context of a PPF, opportunity cost is directly related to the shape of the curve. If the shape of the PPF curve is straight-line, the opportunity cost is constant as production of different goods is changing. But, opportunity cost usually will vary depending on the start and end point. In the diagram on the above, producing more oranges results in less apples, this can be carted on the line between the two. So producing 10 more oranges could be an opportunity cost of 5 less apples. 

Opportunity cost has been seen as the foundation of the marginal theory of value as well as the theory of time and money. It has received criticism as an over simplification of markets, but it does help economists understand the relation between goods and resources. 

Government policy, and technology can produce a dramatic shift in the PPF. 

The Demand Curve

Following on from supply and demand, there needs to be a way to chart and understand this relationship in visual form. Economists use the supply and demand curve to do so. It is best to get acquainted with the graphical representation of the study before they become too much.

In the diagram below, supply is illustrated by the upward sloping blue line and demand is illustrated by the downward sloping green line. At a price of P* and a quantity of Q*, the quantity demanded and the supply demanded intersect at the Equilibirum Price. At equilibrium price, suppliers are selling all the goods that they have produced and consumers are getting all the goods that they are demanding. This is the optimal economic condition, where both consumers and producers of goods and services are satisfied.

The quantity demand is the price and quantity the market is willing to pay for an item. Price and quantity demand have an inverse relationship. When price goes up the demand goes down, and when demand goes down the price goes up. The use of this graphing can enable you to make market predictions. 

The shift of a demand curve takes place when there is a change in any non-price determinant of demand, resulting in a new demand curve. Non-price determinants of demand are those things that will cause demand to change even if prices remain the same—in other words, the things whose changes might cause a consumer to buy more or less of a good even if the good's own price remained unchanged. Some of the more important factors are the prices of related goods (both substitutes and complements), income, population, and expectations. However, demand is the willingness and ability of a consumer to purchase a good under the prevailing circumstances; so, any circumstance that affects the consumer's willingness or ability to buy the good or service in question can be a non-price determinant of demand.

So a good example of a shift of demand is policy changes: The government changes the law on smoking in public places and forces smokers to smoke outside holding a picture of a cancer cell. The tobacco control policies can affect consumer buying decisions and can alter the supply and demand of cigarettes.

Various examples of demand shifters are:

• Changes in disposable income,
• Changes in tastes and preferences - tastes and preferences are assumed to be fixed in the short-run. This assumption of fixed preferences is a necessary condition for aggregation of individual demand curves to derive market demand.
• Changes in expectations,
• Changes in the prices of related goods (substitutes and complements),
• Population size and composition.

Changes that decrease demand

• decrease in price of a substitute,
• increase in price of a complement,
• decrease in consumer income if the good is a normal good,
• increase in consumer income if the good is an inferior good.

Market or aggregate demand is the summation of individual demand curves. In addition to the factors which can affect individual demand there are three factors that can affect market demand:

• a change in the number of consumers,
• a change in the distribution of tastes among consumers,
• a change in the distribution of income among consumers with different tastes.

Changes that cause Demand Shift:

• Decrease in price of a substitute,
• Increase in price of a complement,
• Decrease in income if good is normal good,
• Increase in income if good is inferior good.

The Backyard Economist: The Basic Economics Principles

The Backyard Economist: The Basic Economics Principles: Nerdy introduction to the basics.

The Basic Economics Principles

Economics is the social science studying the decisions we make and why we make them. A nerdy economist looks at production, distribution and consumption of goods and services.

It is a complex social science that spans from mathematics to psychology. At its most basic, however, economics considers how a society provides for its needs.

Looking at Maslows Hierarcy of Needs Our most basic need is survival; which requires food, clothing and shelter. Once those are covered, it can then look at more sophisticated commodities such as services, personal transport, entertainment, the list goes on. How do we satisfy these needs?

Supply and demand is perhaps one of the most fundamental concepts of economics and it is the backbone of a market economy. Demand refers to how much (quantity) of a product or service is desired by buyers. The quantity demanded is the amount of a product people are willing to buy at a certain price; the relationship between price and quantity demanded is known as the demand relationship. Supply represents how much the market can offer. The quantity supplied refers to the amount of a certain good producers are willing to supply when receiving a certain price. The correlation between price and how much of a good or service is supplied to the market is known as the supply relationship. Price, therefore, is a reflection of supply and demand.

Microeconomics is the study of decisions that people and businesses make regarding the allocation of resources and prices of goods and services. This means also taking into account taxes and regulations created by governments. Microeconomics focuses on supply and demand and other forces that determine the price levels seen in the economy. For example, microeconomics would look at how a specific company could maximize it's production and capacity so it could lower prices and better compete in its industry.

Macroeconomics, on the other hand, is the field of economics that studies the behavior of the economy as a whole and not just on specific companies, but entire industries and economies. This looks at economy-wide phenomena, such as Gross Domestic Product (GDP) and how it is affected by changes in unemployment, national income, rate of growth, and price levels. For example, macroeconomics would look at how an increase/decrease in net exports would affect a nation's capital account or how GDP would be affected by unemployment rate.

While these studies of economics may appear different, actually they are very much linked.  For example, increased inflation (macro effect) would cause the price of raw materials to increase for companies and in turn affect the end product's price charged to the public. Which then introduces the study of scarcity.