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
What is a fixed factor?
It is usually an element of capital but it might be land, the services of management, or even the supply of skilled labour
What are inputs that are not fixed and can be varied in the short run called?
They are called variable factors
Does the short run correspond to a specific length of time?
No as it depends on what sort of outputs are fixed/variable
The long run is the length of time over which all the firms’s factors of production can be [fixed/varied], but its technology is [fixed/varied]
Varied
Fixed
Does the long run correspond to a specific length of time?
No, it does not
The very long run is the length of time over which all the firm’s factors of production and its technology can be [fixed/varied]
Varied
What is the total product? (TP)
It is the total amount produced during a given period of time
What is the average product? (AP)
It is the total product divided by the number of units of the variable factor used to produce it
What is the equation for average product? (AP)
AP = TP/L
L being units of labour
What is the marginal product? (MP)
The marginal product is the change in total output that results from using one more unit of a variable factor
What is the equation for marginal product? (MP)
MP = ΔTP/ΔL
When does average product increase in relation to the marginal product curve?
When the marginal product is above the average product
When does average product decerase in relation to the marginal product curve?
When the marginal product is below the average product
What is the law of diminishing 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 happens to marginal product when an additional worker’s output raises average product?
Marginal product exceed average product
What happens to marginal product when an additional worker’s output reduces average product?
Marginal product is less than average product
In which direction does the AP curve’s slope move when the MP curve is above it? below it?
Upward
Downward
At what point does the MP curve intersect with the AP curve?
At the MP curve’s maximum point
What is the equation for Total Cost? (TC)
TC = TFC + TVC
What is the equation for Average Total Cost? (ATC)
ATC = AFC + AVC
How can you find ATC with TC?
By doing TC/Q
How can you find Average Fixed Cost (AFC) with Total Fixed Cost (TFC)?
By doing TFC/Q
How can you find Average Variable Cost (AVC) with Total Variable Cost (TVC)?
By doing TVC/Q
What is marginal cost? (MC)
It is the increase in total cost resulting from increasing output by one unit
What is the equation for MC?
MC = ΔTC/ΔQ
Marginal costs are always marginal [fixed/variable] costs because [variable/fixed] costs do not change as output varies
Variable
Fixed
Does TFC change with output in the short run?
No
Where does the MC curve intersect with the ATC and AVC curves in the short run?
It intersects with the ATC and AVC curves at their minimums
How is the ATC curve derided geometrically?
By vertically adding the AFC and AVC curves
The ATC curve [increases/decreases] initially as output increases, reaches a minimum, and then rises as output increases further
decreases
What is the shape of the ATC curve?
It is U shaped
What does an eventually diminishing AP of the variable factor imply?
An eventually rising AVC
When is AVC at its minimum in relation to AP?
When AP is at its maximum
What does an eventually diminishing MP of the variable factor imply?
An eventually rising MC
When does MC reach its minimum in relation to MP?
When MP reaches its maximum
What is the level of output that corresponds to the minimum short-run average total cost for the firm?
The capacity of the firm
What is capacity?
It is the largest output that can be produced without encountering rising average costs per unit
A firm that is producing at an output less than the point of minimum average total cost is said to have what kind of capacity?
Excess capacity
What kind of shift occurs for the ATC and MC curves when there is an increase in the price of a variable factor?
An upward shift
An increase in the price of a fixed factor [increases/decreases] the firm’s total fixed costs, but its variable costs are unchanged
increases
What kind of shift occurs for the ATC and MC curves when there is an increase in the firm’s total fixed costs and no change in its variable costs?
ATC curve shifts upward
MC curve does not change
