CHAP. 7 Flashcards
HOW CAN A FIRM BE ORGANIZED
1.A single proprietorship
2.An ordinary partnership
3.The limited partnership (general and limited)
4.A corporation (private and public)
5.A state-owned enterprise (Crown corporations)
6.Non-profit organizations
WHATS A MULTINATIONAL ENTREPRISE (MNE)
Firms that have operations in more than one country
common for limited partnerships and very common for larger corporations
WHAT IS THE FINANCIAL CAPITAL
The money a firm raises for carrying on its business
2 TYPES : Equity and debt
WHAT IS EQUITY
A corporation acquires funds from its owners in return for stocks, shares, or equities, which are basically ownership certificates.
Dividendes: Profits that are paid out to shareholders
WHAT IS DEBT
-The firm’s creditors are not owners.
–A loan with a loan agreement or IOU.
–Firms can borrow from financial institutions
.–Firms can borrow from non-bank lenders using debt instruments or bonds.
–Firms are obligated to pay the principal and interest.
2 KEY ASSUMPTIONS ABOUT FIRMS
1.Firms are assumed to be profit-maximizers.
2.Each firm is assumed to be a single, consistent, decision-making unit.
4 TYPES OF INPUT FOR PRODUCTION
1.Inputs that are outputs from some other firm are called intermediate products
2.Inputs provided directly by nature (raw material)
3.Inputs that are the services of labour
4.Inputs that are the services of physical capital (machines, building, office space, etc)
WHAT IS THE PRODUCTION FUNCTION
- Shows the maximum output that can be produced by a combination of inputs.
- Describes the technological relationship between the inputs that a firm uses and the output that it produces.
- Flow concept
Q= f(L, K)
Q: quantity produced
f: technology
L: labor
K: capital
WHAT ARE EXPLICIT COSTS
- involve a purchase of goods or services by the firm.
- include the hiring of workers, the rental of equipment, interest payments on debt, and the purchase of intermediate inputs.
- include depreciation – a cost that arises because of the wearing out of physical capital – which does not involve a market transaction.
WHAT ARE ACCOUNTING PROFITS
Accounting profits = Revenues – Explicit Costs
WHAT IS ECONOMIC PROFIT
The difference between the revenues received from the sale of output and the opportunity cost of the inputs used to make the output.
Economic profit = Revenues - (Explicit costs + Implicit costs)
Economic profit = Accounting profits – Implicit costs
IF THE ECONOMIC SURPLUS IS NEGATIVE = ECONOMIC LOSSES
WHAT ARE IMPLICIT COSTS
The costs of items for which there is no market transaction but for which there is still an opportunity cost for the firm.
- Include the opportunity cost of the owner’s time and the opportunity cost of the owner’s capital.
WHAT IS A FIRMS ECONOMIC PROFIT
The difference between the total revenue (TR) each firm derives from the sale of its output and the total cost (TC) of producing that output
π = TR - TC
WHAT IS THE SHORT RUN
A time period in which the quantity of some inputs, called fixed factors, cannot be changed.
FIXED FACTOR VS VARIABLE FACTOR
FIXED: Usually an element of capital but it might be land, the services of management, or even the supply of skilled labour.
VARIABLE: Inputs that are not fixed and can be varied in the short run
WHAT IS THE LONG RUN
The length of time over which all of the firm’s factors of production can be varied, but its technology is fixed.
The very long run is the length of time over which all the firm’s factors of production and its technology can be varied.
WHAT ARE THE TOTAL AND AVERAGE PRODUCTS
–Total product (TP) is the total amount produced during a given period of time.
–Average product (AP) is the total product divided by the number of units of the variable factor used to produce it.
AP = TP/L
L: LABOR
WHAT IS THE MARGINAL PRODUCT
The change in total output that results from using one more unit of a variable factor.
MP = ΔTP/ΔL
WHAT IS THE LAW OF DEMINISHING RETURNS
*To increase output in the short run, more and more of the variable factor is combined with a given amount of the fixed factor.
*Each successive unit of the variable factor has less and less of the fixed factor to work with.
*Eventually equal increases in work effort begin to add less and less to total output.
WHAT IS MARGINAL COST
The increase in total cost resulting from increasing output by one unit.
MC = ΔTC/ΔQ
TFC
Is constant
MC
MC curve intersects the ATC and AVC curves at their minimums
MC AND AVC HAVE U-SHAPED CURVES BECAUSE
*Key idea: Each additional worker adds the same amount to total cost but a different amount to total output.
*Eventually diminishing APof the variable factor implies an eventually rising AVC
AVC is at its minimum when AP reaches its maximum.
*Eventually diminishing MPof the variable factor implies eventually rising MC
MC reaches its minimum when MP reaches its maximum.
WHAT IS THE CAPACITY OF A FIRM
The level of output that corresponds to the minimum short-run average total cost
Capacity is the largest output that can be produced without encountering rising average costs per unit.
WHEN DOES A FIRM HAVE EXCESS CAPACITY
When they are producing at an output less than the point of minimum average total cost
DIFFERENT SHIFTS IN SHORT-RUN COST CURVES
*An increase in the price of a variable factor shifts ATC and MC upward.
*An increase in the price of a fixed factor increases the firm’s total fixed costs, but its variable costs are unchanged.
*The ATC curve shifts upward but the MC curve does not change.
