Chapter 7 Flashcards
What are the 6 different ways that firms can be organized?
- A single proprietorship
- An ordinary partnership (many owners who share full responsibility
- The limited partnership (general and limited) (one person in general has full responsibility; others have limited liability)
- A corporation (private and public) (a ‘moral’ person with shareholders)
- A state-owned enterprise (Crown corporations)
- Non-profit organizations
The first 3 are private
What are firms that have operations in more than one country called?
They are called multinational enterprises (MNEs)
Even Crown corporations may be multinational enterprises such as Hydro Quebec (they own plants in Vermont, New Hampshire and Massachusetts)
Multinational enterprises are [unusual/usual] for single proprietorships and ordinary partnerships, but [uncommon/common] for limited partnerships and very [uncommon/common] for larger corporations
Unusual
Common
Common
What is the money that a firm raises for carrying its business called?
It is called financial capital
Is financial capital like physical capital? (firm’s assets such as factories, machinery, offices, and fleets of vehicles)
No, it is distinct
What are the basic types of financial capital used by firms?
They are equity and debt
What is equity for firms?
In individual proprietorships and partnerships, one or more owners provide much of the required funds.
A corporation acquires funds from its owners in return
for stocks, shares, or equities, which are basically ownership certificates.
Profits that are paid out to shareholders are called dividends.
What is debt for firms?
The firm’s creditors are not owners.
A loan with a loan agreement or IOU (informal documents acknowledging debt)
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.
What are the two key assumptions that economists make about firm behaviour?
- Firms are assumed to be profit-maximizers
- Each firm is assumed to be a single, consistent, decision-making unit
What are the two competing views when asking the question “Is it socially responsible to maximize profits?”
- Unadorned capitalism/goal of profit maximization does not serve the broader public interest
- Goal of maximizing profits benefits customers and their employees, and leads to innovation, which improves living standards
What are the 4 types of inputs that firms use for production?
- Inputs that are outputs from some other firm are called intermediate products
- Inputs provided directly by nature
- Inputs that are the services of labour
- Inputs that are the services of physical capital
What does the production function show?
It shows the maximum output that can be produced by a combination of inputs. It describes the technological relationship between the inputs that a firm uses and the output that it produces
What is the functional notation of the production function?
Q = f (L, K)
What kind of concept is production?
It is a flow concept
What do explicit costs involve?
They involve a purchase of goods or services by the firm
What do explicit costs include?
They include the hiring of workers, the rental of equipment, interest payments on debt, the purchase of intermediate inputs, and depreciation
What is depreciation?
It is when a cost arises because of the wearing out of physical capital which does not involve a market transaction
What is the equation for accounting profits?
Accounting profits = Revenues - Explicit costs
How do you find economic profit?
By subtracting explicit costs and implicit costs from revenues
What are implicit costs?
They are the costs of items for which there is no market transaction but for which there is still an opportunity cost for the firm
What do implicit costs include?
They include the opportunity cost of the owner’s time and the opportunity cost of the owner’s capital
How can we find economic profit?
By finding the difference between the revenues received from the sale of output and the opportunity cost of the inputs used to make the output
What is the equation for Economic proft?
Economic profit = Revenues - (Explicit costs + Implicit costs)
or
Economic profit = Accounting profits - Implicit costs
What are negative economic profits called?
They are called economic losses
What is a firms economic profit equal to?
It is equal to 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
The short run is a time period in which the quantity of some inputs, called [fixed/variable] factors, cannot be changed
Fixed
