Chapter 7 : Production in the Short Run Flashcards
types of firms (6)
- Single proprietorship
- Ordinary partnership
- Limited partnership
- Limited liability partnership (LLP)
- Corporations (limited liability) (private and public)
- State-owned enterprise (Crown corporations)
- Non-profit organizations
Describe the single proprietorship
1 manager, reponsible for all aspects of his business (debts included).
Describe the ordinary partnership
Two or more joint owners.
They are each responsible for all of the partnership’s debts.
Include the startups.
Describe the limited partnership
There can be 2 types of partners:
- General partners : take part in the running of business and are liable for debts
- Limited partners : no part in the running of the business, and liability limited to the amount invested in the enterprise.
Describe the limited liability partnership (LLP)
Every partner has limited liability.
Describe the limited liability corporation (LLC)
The firm has its own identity.
The owners are not responsible for the things done in the name of the firm, but the directors might be
Distinguish between private LLCs and public LLCs
Private : their shares are not traded on the stock exchange
Public : their shares may be traded on the stock exchange.
Describe the state-owned enterprise
We call them Crown corporations in Canada
- Owned by the government
- Similar organization and legal status as a corporation
- Under the direction of a ± independent board.
Ex. VIA train rail in Canada
Describe non-profit organizations.
Their explicit objective is to provide foods and services (sold or for free).
The profits generated remain within the organization, are not claimed.
They earn revenues through a combination of sales and donations.
Ex. YMCA
What type of firm (public or private) dominates the market?
Private type firms.
What do we call the money a firm raises from carrying on its business?
A financial capital.
It is distinct from the physical capital, firm’s assets, which are factories, machinery, offices and fleets of vehicles.
2 types of financing capitals of firms
- Equity
- Debt
Describe the equity-type of Financial capital.
One or + owners provide much of required funds, often in exchange of stocks, share of equities (in the case of Corporations).
Profits that are paid out to the shareholders are called dividends.
What is a dividend?
The profit paid out to shareholders.
Describe the debt-type of financial capital
The firm’s creditors are not owners, the loan is done with an agreement or an IOU.
Firms are obligated to pay the principal and the interest.
Where can firms borrow money from?
-Financial institutions
-Non-bank lenders using debt instruments or bonds
2 assumptions we make about firms in the course
- Profit maximization
- Each firm is a single, consistent decision-making unit.
What to consider in the question of : Is it Responsible for firms to maximize profits?
- Does it serve the broader public’s interest?
- Does it benefit the costumers and the employees, and lead to innovations, which improve living standards?
Other things to consider: environment, market structure, government intervention
Describe the production function rule
Q = f(K,L)
Q = flow of output
K = flow of capital services
L = flow of labour services
These are the 2 main inputs we consider.
What are the 4 types of inputs for production that a firm uses?
- Inputs that are outputs from some other firm (intermediate inputs)
- Inputs provided by nature
- Inputs that are the services of labour
- Inputs that are the services of physical capital.
The last 2 are the ones we consider in the calculs.
Is production a flow or a stock concept?
It is a flow concept.
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 outputs that it produces.
True or False? A change in technology means a change in the production function.
True. Example with a company which requires some machinery and a lot of people VS company with only machinery.
Definition of explicit cost and what they include.
The purchase of goods and services by a firm.
It includes hiring workers, the rental of equipment, the interest payments on debt, the purchase of intermediate inputs.
Depreciation is also included in the explicit cost.
Accountants care only about explicit costs.
Explain the slope of the TP curve in function of the variable factor
Because of the law of diminishing returns, eventually there is a point where more of the variable factors decreases the marginal product, therefore leading to a smaller and smaller augmentation of the total product.
Describe the slopes of the MP and the AP curves in relation to the amount of variable factor
MP : diminishing returns means theres less and less returns after a certain point, explains the triangular shape.
AP : at a point, since the additional input starts producing less and less TP, the curve diminishes.
At what point do the AP and MP curves intersect?
Explain why the MP curve is above the AP at point 3 of the X axis
MP > AP because the additional input will generate more additional output than the current average output
It will increase the average.
Explain why the AP is above the MP curve at this point.
Because the additional variable input generates less than the current average product, which drags down the average curve.
Is the AVC line U-Shaped or linear?
It is U-Shaped
Is the AFC U-Shaped or linear?
It is linear.
Is the ATC U-Shaped or linear?
U-Shaped.
Is the MC curve U-Shaped or linear?
U-Shaped.
