Chapter 7 Flashcards
In an ordinary partnership, what are you responsible for ?
In an ordinary (general) partnership, each partner is personally liable for all of the firm’s debts. This means Mary would be responsible for the entire debt of the firm, not limited to her investment or any specific amount.
Describe an ordinary partnership :
has two or more joint owners, each of whom is personally responsible for all of the partnership’s debts.
Describe a corporation
owners are not personally responsible for anything that is done in the name of the firm
Describe a limited partnership
one type of partner takes part in managing the firm and is personally liable for the firm’s actions and debts, and the other type of partner takes no part in the management of the firm and risks only the money that they have invested
A firm can obtain funding by doing what ?
Selling bonds, retaining earnings, selling shares
In theory, whats the firm main objective ?
In economic theory, we assume that the firm’s objective is to maximize its profit.
Difference between ordinary and limited partnership
having two classes of owners with different liabilities and managing roles. (general partners and limited ones)
whats the production function
way to show how different resources (like labor, machines, or raw materials) are combined to produce goods or services. It describes the relationship between the inputs (factors of production) and the output (the final product).
whats explicit vs implicit costs :
explicit : out of pocket direct expenses.
Implicit costs : Implicit costs represent the opportunity cost of using resources in one way instead of their next best alternative.
Economic profits =
Revenues -(Explicit costs
+ Implicit costs)
Implicit costs that must be considered when calculating a firm’s economic profit include the opportunity cost of the owner’s ???? and the opportunity cost of the owner’s
????
time, capital
A firm earning positive accounting profits could have zero economic profits
if the owner’s capital is earning exactly its opportunity cost.
So, if the owner’s capital (their money invested in the firm) is earning exactly what it would have in the next best alternative (its opportunity cost), the firm’s economic profit is zero, even though it still shows positive accounting profits. This means the owner is just earning enough to cover what they could have earned elsewhere, but not more.
Explain short run vs long run
the short run is when only some things can change, and the long run is when everything can be changed, except for the technology.
Accounting profit vs Economic Profit
Accounting profit ignores opportunity costs and focuses only on actual out-of-pocket expenses.
Economic profit considers all costs, including the value of what could have been earned elsewhere with the same resources.
Ressources tend to flow away when ?
Economic profits are less than 0.
Explain the law of diminishing marginal returns
if you keep adding more of one resource (like workers) to a fixed amount of something else (like machines or space), the extra benefit or output you get from each new addition will eventually shrink.
Explain whats the marginal product
its the extra output you get when you add one more unit of a resource, like one more worker or one more machine, while keeping everything else the same.
Explain the relation between average product and marginal product on a graph
AP is rising (getting better) as long as MP is above AP. Think of it like when a new worker is more productive than the average, they pull the average up.
AP is falling (getting worse) when MP is below AP. This is like when a new worker is less productive than the average, so they drag the average down.
the point where the marginal product reaches its highest value before falling, is called ?
the point of diminishing marginal productivity.
How can marginal product of labor starts to fall. (Become negative)
For example, imagine 20 workers trying to cook in a small kitchen: too many people would slow things down and reduce how much food gets made.
Average variable cost curves are U-shaped because eventually
At first, workers are very productive, so the cost per unit (AVC) goes down.
Later, as more workers are added, they become less productive (diminishing average product). This means it costs more to produce each unit, so AVC starts to rise.
Whats the capacity ?
. The level of output that corresponds to a firm’s minimum short-run average total cost
Explain ATC, AFC, AVC
AVC : The cost of variable inputs (like labor or materials) per unit of output. If producing 10 units costs $50 in variable costs, the AVC is $5 per unit.
ATC : The total cost (fixed + variable) divided by the number of units produced. For example, if total costs are $200 for 10 units, the ATC is $20 per unit.
ATC = AVC + AFC.
AFC : The fixed costs (like rent or equipment) divided by the number of units produced. For example, if fixed costs are $100 and 10 units are produced, the AFC is $10 per unit.
Note: AFC decreases as more units are produced.
