MELCs: Analyze the forms and economic roles of business organization; and

Differentiate the phases of economic development and its impact to economic

development.

Copied from Phinma AU Facilitator Lesson Plan

http://www.econedmontana.org/resources/elms/files/16_business_economy.pdf
http://smallbusiness.chron.com/important-small-businesses-local-economies-5251.html

Role of Business in Relation to the Economy.

Business may be understood as the organized efforts of enterprise to supply consumers with goods and
services for a profit. Businesses vary in size, as measured by the number of employees or by sales
volume. But, all businesses share the same purpose: to earn profits.
The purpose of business goes beyond earning profit. There are:
• It is an important institution in society.
• Be it for the supply of goods and services
• Creation of job opportunities
• Offer of better quality of life
• Contributing to the economic growth of the country

Hence, it is understood that the role of business is crucial. Society cannot do without business. It needs
no emphasis that business needs society as much

The following are the important roles of businesses in the economy:

Businesses play a vital role in employment growth. Businesses also expand and improve infrastructure
and develop or recruit a highly skilled and educated workforce. They stimulate economic development
in rural and far-flung areas. They serve as valuable partners to large enterprises as suppliers and
providers of support services. They serve as breeding ground for new entrepreneurs and large
corporations.

Small businesses contribute to local economies by bringing growth and innovation to the community in
which the business is established. Small businesses also help stimulate economic growth by providing
employment opportunities to people who may not be employable by larger corporations. Small
businesses tend to attract talent who invent new products or implement new solutions for existing
ideas. Larger businesses also often benefit from small businesses within the same local community, as
many large corporations depend on small businesses for the completion of various business functions
through outsourcing.
To understand the important role that business plays in the economy and its influence on your standard
of living, imagine a world in which you personally had to produce everything you consume. You would
have to grow your own food, sew your own clothes, cook all of your meals, and build your own car,
computer, cell phone, house, and furniture. It would be impossible to actually complete all of these
activities on your own. Only a fraction of these activities could be completed because it takes a lot of
time and resources to learn how and to build a car, computer, house, and so forth. Time and resources
are scarce, and people have to make choices about how they spend them.

Because business is present in the economy, we are able to consume and enjoy many more goods and
services than we otherwise could if we had to produce everything on our own. Compare your life today
with the one described above.

Different Phases of Economic Development

Traditional society. This is an agricultural economy of mainly subsistence farming, little of which is
traded. The size of the capital stock is limited and of low quality resulting in very low labor productivity
and little surplus output left to sell in domestic and overseas markets

Pre-conditions for take-off. Agriculture becomes more mechanized and more output is traded. Savings
and investment grow although they are still a small percentage of national income (GDP). Some external
funding is required - for example in the form of overseas aid or perhaps remittance incomes from
migrant workers living overseas

Take-off. Manufacturing industry assumes greater importance, although the number of industries
remains small. Political and social institutions start to develop - external finance may still be required.
Savings and investment grow, perhaps to 15% of GDP. Agriculture assumes lesser importance in relative
terms although the majority of people may remain employed in the farming sector. There is often a dual
economy apparent with rising productivity and wealth in manufacturing and other industries contrasted
with stubbornly low productivity and real incomes in rural agriculture.

Drive to maturity. Industry becomes more diverse. Growth should spread to different parts of the
country as the state of technology improves - the economy moves from being dependent on factor
inputs for growth towards making better use of innovation to bring about increases in real per capita
incomes.

Age of mass consumption. Output levels grow, enabling increased consumer expenditure. There is a shift
towards tertiary sector activity and the growth is sustained by the expansion of a middle class of
consumers
Aside from the different phases of economic development, others prefer to use the stages in economic
development which encompasses four (4) stages, namely;

Subsistence Economy – virtually all of the population works in agriculture (as a farmer)/the average
person makes about $300 per year/no surplus money to invest in the health or education of his family.

Commercial Economy – have a small surplus of wealth to invest in the health and education/division and
specialization of labor occurs/the country’s citizens (and government) can now make investments which
allow their economy function more efficiently.

Emerging Market Economy – infrastructure is now quite sophisticated/Primary education is nearly

universal (substantially increasing literacy rates) and secondary (or high school) education is now
widespread/has universal basic health services, including safe drinking water and hospitals with vaccines
to treat illness

Technology – Based Economy – large portion (perhaps 30%) of the population is now college-
educated/able to detect and cure most disease, even particularly hard to cure illnesses such as cancer;
this leads to very long life spans averaging about 80 years/has an advanced network of physical
infrastructure

One of the first decisions that you will have to make as a business owner is how the business should be
structured. All businesses must adopt some legal configuration that defines the rights and liabilities of
participants in the business’s ownership, control, personal liability, life span, and financial structure.
There are three (3) basic forms of business organization:

 Sole Proprietorship

 Partnership

 Corporation

Sole Proprietorship The vast majority of small businesses start out as sole proprietorships. These firms
are owned by one person, usually the individual who has day-to-day responsibility for running the
business. Sole proprietorships own all the assets of the business and the profits generated by it. They
also assume complete responsibility for any of its liabilities or debts. In the eyes of the law and the
public, you are one in the same with the business.

Partnership In a Partnership, two or more people share ownership of a single business. Like
proprietorships, the law does not distinguish between the business and its owners. The Partners should
have a legal agreement that sets forth how decisions will be made, profits will be shared, disputes will
be resolved, how future partners will be admitted to the partnership, how partners can be bought out,
or what steps will be taken to dissolve the partnership when needed; Yes, it’s hard to think about a
“break-up” when the business is just getting started, but many partnerships split up at crisis times and
unless there is a defined process, there will be even greater problems. They also must decide up front
how much time and capital each will contribute, etc.

Corporation A Corporation, chartered by the state in which it is headquartered, is considered by law to

be a unique entity, separate and apart from those who own it. A Corporation can be taxed; it can be
sued; it can enter into contractual agreements. The owners of a corporation are its shareholders. The
shareholders elect a board of directors to oversee the major policies and decisions. The corporation has
a life of its own and does not dissolve when ownership changes.

In addition to those basic forms of business ownership, these are some other types of organizations that
are common today:

Cooperative

A cooperative is a business organization owned by a group of individuals and is operated for their
mutual benefit. The persons making up the group are called members. Cooperatives may be
incorporated or unincorporated.

Some examples of cooperatives are: water and electricity (utility) cooperatives, cooperative banking,
credit unions, and housing cooperatives.

Advantages of a Sole Proprietorship • Easiest and least expensive form of ownership to organize. • Sole
proprietors are in complete control, and within the parameters of the law, may make decisions as they
see fit. • Profits from the business flow-through directly to the owner’s personal tax return. • The
business is easy to dissolve, if desired

Disadvantages of a Sole Proprietorship • Sole proprietors have unlimited liability and are legally
responsible for all debts against the business. Their business and personal assets are at risk. • May be at
a disadvantage in raising funds and are often limited to using funds from personal savings or consumer
loans. • May have a hard time attracting high-caliber employees, or those that are motivated by the
opportunity to own a part of the business. • Some employee benefits such as owner’s medical insurance
premiums are not directly deductible from business income (only partially as an adjustment to income).

Advantages of a Partnership • Partnerships are relatively easy to establish; however time should be
invested in developing the partnership agreement. • With more than one owner, the ability to raise
funds may be increased. • The profits from the business flow directly through to the partners’ personal
tax return. • Prospective employees may be attracted to the business if given the incentive to become a
partner. • The business usually will benefit from partners who have complementary skills. Disadvantages
of a Partnership • Partners are jointly and individually liable for the actions of the other partners. •
Profits must be shared with others. • Since decisions are shared, disagreements can occur. • Some
employee benefits are not deductible from business income on tax returns. • The partnership may have
a limited life; it may end upon the withdrawal or death of a partner.

Advantages of a Corporation • Shareholders have limited liability for the corporation’s debts or
judgments against the corporation. • Generally, shareholders can only be held accountable for their
investment in stock of the company. (Note however, that officers can be held personally liable for their
actions, such as the failure to withhold and pay employment taxes. • Corporations can raise additional
funds through the sale of stock. • A Corporation may deduct the cost of benefits it provides to officers
and employees. • Can elect S Corporation status if certain requirements are met. This election enables
company to be taxed similar to a partnership. Disadvantages of a Corporation • The process of
incorporation requires more time and money than other forms of organization. • Corporations are
monitored by federal, state and some local agencies, and as a result may have more paperwork to
comply with regulations. • Incorporating may result in higher overall taxes. Dividends paid to
shareholders are not deductible from business income; thus this income can be taxed twice.

identify if the statement about business is true or false. Write T if it is true and F if the statement is false.
Write the letter of your answer in the space before the number. Are you ready?

_True_1. Major supplier of jobs and employment

_False_2. Generates garbage and trash to society

_True_3. Greatest contribution to economy

_False_4. Offer an exhaustive life to community people

_True_5. It alleviates poverty of the people

_True_6. Creates innovation

_True_7. Builds high morale to people because of employment

_True_8. A great partner of the society

_True_9. Brings hope to people

_True_10. Promotes economic development

1. In which economic development phase does industry starts to become more diverse and growth
should spread throughout the country?

a. Emerging Market Economy

b. Pre-conditions for take-off

c. Drive to Maturity

d. Commercial Economy

2. In this phase there is a shift towards tertiary sector activity and the growth is sustained by the
expansion of a middle class of consumers.

a. Drive to Maturity

b. Technology – Based Economy

c. Emerging Market Economy

d. Age of Mass Consumption

3. In this stage of economic development the large portion (perhaps 30%) of the population is now
college-educated.

a. Drive to Maturity

b. Technology – Based Economy

c. Emerging Market Economy

d. Age of Mass Consumption

4. This is an agricultural economy of mainly subsistence farming, little of which is traded.

a. Traditional Society

b. Subsistence Economy

c. Traditional Economy

d. Subsistence Society

5. Which of the following is not a stage in economic development?

a. Subsistence Economy

b. Technology – Based Economy

c. Traditional Economy
d. Commercial Economy

6. Which of the following is not a positive impact of business in the economy and society?

a. Promote Economic Development

b. Earn Profits

c. Alleviates Poverty

d. Contribute to the Economic Growth

7. Which of the following is not an example of the purpose of the business beyond earning profit?

e. Be it for the supply of goods and services

f. Offer of better quality of life

g. Creation of job opportunities

h. None of the above

8. 1st Statement: Businesses play a vital role in employment growth.

2nd Statement: Businesses also expand and improve infrastructure and develop or recruit a highly
skilled and educated workforce.

a. 1st True, 2nd True

b. 1st True, 2nd False

c. 1st False, 2nd True

d. 1st False, 2nd False

9. All businesses share the same purpose: _____________.

e. To create employment

f. To earn profits

g. To contribute in the economic growth

h. To alleviate poverty

10. Businesses play a vital role in ____________________.

e. Employment Growth

f. Economic Development

g. Poverty Alleviation

h. Improving the Quality of Life

Direction: Identify if the statements about business is true or false. Write T if True and F if False.

_T_1. Businesses play a vital role in employment growth.

_F_2. Society can do without business.

_F_3. Businesses stimulate economic development only in urban areas.

_T_4. Small businesses contribute to local economies by bringing growth and innovation to the
community in which the business is established.

_T_5. Businesses vary in size, as measured by the number of employees or by sales volume.

Direction: Identify which phase/stage is being described by the statements below.

_Emerging Market Economy_1. Infrastructure is now quite sophisticated/Primary education is nearly

universal and secondary education is now widespread/has universal basic health services.

_Subsistence Economy______2. Virtually all of the population works in agriculture (as a farmer).

_Drive to Maturity__________3. Growth should spread to different parts of the country as the state of
technology improves.

_Age of Mass Consumption__4. Output levels grow, enabling increased consumer expenditure.

_Take-off_________________5. Agriculture assumes lesser importance in relative terms although the

majority of people may remain employed in the farming sector.

_Technology – Based Economy6. Large portion (perhaps 30%) of the population is now college-
educated/able to detect and cure most disease.

_Commercial Economy______7. Division and specialization of labor occurs.

_Traditional Society_________8. The size of the capital stock is limited and of low quality resulting in
very low labor productivity and little surplus output left to sell in domestic and overseas markets

_Pre-conditions for Take-off__9. Agriculture becomes more mechanized and more output is traded.
Savings and investment grow although they are still a small percentage of national income (GDP).

identifying which business organization form the advantage/disadvantage stated pertains. Write A if the
given advantage/disadvantage is Sole Proprietorship, B if it is a Partnership, and C for Corporation. Write
the letter of your answer in the space before the number. Are you ready?

_B_1. The profits from the business flow directly through to the partners’ personal tax return.

_A_2. Often limited to using funds from personal savings or consumer loans.
_C_3. May deduct the cost of benefits it provides to officers and employees.

_B_4. Profits must be shared with others.

_A_5. The business is easy to dissolve, if desired.

_A_6. May have a hard time attracting high-caliber employees.

_B_7. With more than one owner, the ability to raise funds may be increased.

_C_8. Shareholders can only be held accountable for their investment in stock.

_C_9. Dividends paid to shareholders are not deductible from business income; thus this income can be
taxed twice.

_B_10. Since decisions are shared, disagreements can occur.

identify with form of business organization is being describe by the statements below. Write you answer
in the space before the number. Let’s go!

_Cooperative_1. Owned by a group of individuals and is operated for their mutual benefit.
_Partnership_2. Two or more people share ownership of a single business.

_Sole Proprietorship_3. The vast majority of the small businesses. _Partnership_4. Should have a legal
agreement that sets forth how decisions will be made, profits will be shared, disputes will be resolved,
etc.

_Sole Proprietorship_5. Owned by one person. _Corporation_6. Considered by law to be a unique entity,
separate and apart from the owners.

answer the following questions by encircling the letter of your answer. Are you ready?

1. Which of the following describes a sole proprietorship?

a. Easiest and least expensive form of ownership to organize.

b. May have a hard time attracting high-caliber employees.

c. Owned by one person

d. All of the above

2. Credit Union is an example of what form of business organization?

a. Sole Proprietorship

b. Partnership

c. Cooperative

d. Corporation

3. A ______________ may deduct the cost of benefits it provides to officers and employees.

a. Sole Proprietorship
b. Partnership

c. Cooperative

d. Corporation

4. The ____________ may have a limited life; it may end upon the withdrawal or death of a _______.

a. Sole Proprietorship – Owner

b. Partnership – Partner

c. Cooperative – Member

d. Corporation – Shareholder 5. The ____________ has a life of its own and does not dissolve when
ownership changes.

a. Sole Proprietorship

b. Partnership

c. Cooperative

d. Corporation

Direction: Identify the following statements if it is an advantage or disadvantage of a sole proprietorship,

partnership or corporation. Write A for Advantage and D for Disadvantage, and S for Sole Proprietorship,
P for Partnership and C for Corporation.

_A-C_1. Can raise additional funds through the sale of stock.

_A-P_2. With more than one owner, the ability to raise funds may be increased.

_D-S_3. May have a hard time attracting high-caliber employees, or those that are motivated by the
opportunity to own a part of the business.

_A-S_4. Profits from the business flow-through directly to the owner’s personal tax return.

_D-P_5. Some employee benefits are not deductible from business income on tax returns.

_D-C_6. Monitored by federal, state and some local agencies, and as a result may have more paperwork
to comply with regulations.

_A-P_7. With more than one owner, the ability to raise funds may be increased.

_D-C_8. The process of forming the organization requires more time and money than other forms of
organization.

_A-S_9. The business is easy to dissolve, if desired.

_D-P_10. Since decisions are shared, disagreements can occur.