Economics - Unit 3 Flashcards
Shirking
The behavior of a worker who is putting forth less than the agreed-to effort.
Business firm
An organization that uses resources to produce goods and services that are sold to consumers, other firms, or the government.
Sole proprietorship
A business that is owned by one individual who makes all business decisions, receives all the profits or incurs all the losses of the firm, and is legally responsible for the debts of the firm
Partnership
A business owned by two or more owners, called partners, who share profits and are legally responsible for debts
Corporation
A legal entity that can conduct business in its own name in the same way that an individual does.
Stockholder
A person who owns shares of stock in a corporation
Asset
Anything of value to which the firm has a legal claim
Limited liability
A condition in which an owner of a business firm can lose only the amount he or she has invested (in the firm)
Board of directors
An important decision making body in a corporation. It decides corporate policies and goals, among other things.
Dividends
Shares of the corporation profits distributed to stockholders
Bonds
Statement of debt issued by a corporation
Franchise
A contract by which a firm (usually a corporation) lets a person or group use its name and sell its goods in exchange for certain payments and requirements.
Franchiser
The entity that offers a franchise
Franchisee
The person or group that buys a franchise
Fixed cost
A coat, or expense, that is the same no matter how many units of a good are produced
Variable cost
A cost, or expense, that changes with the number of units of a good produced
Total cost
The sum of fixed costs plus variable costs
Average total cost
The total cost divided by the quantity of output
Marginal cost
The cost of producing an addition unit of a good; the change in total cost that results from producing an addition unit of output
Marginal revenue
The revenue from selling an additional unit of a good; the Change in total revenue that results from selling an additional unit of output
Law of diminishing marginal returns
A law that states that if additional units of one resource are added to another resource in fixed supply, eventually the additional output will decrease
Why does a business need a boss?
To efficiently coordinate and direct the activities of others in the organization
Law of diminishing marginal productivity
If a factor of production is adddd to another factor of production in fixed supply eventually total output will peak and thereafter decrease
Advantages (2) and disadvantages (2) of sole proprietorships
Advantages:
- all profits belong to one person
- complete control of the enterprise
Disadvantages:
- all responsibility to manage business
- unlimited liability
Advantages (1) and disadvantages (1) of a franchise
Advantage:
- ready made product/business
Disadvantage:
- profits and decision-making shared with the corporation
Advantages (1) and disadvantages (1) of a partnership
Advantages:
- specialization possible
Disadvantages:
- potentially difficult decision-making process
Advantages (3) and disadvantages (1) of a corporation
Advantages:
- limited liability
- perpetual existence
- large capitalization possible
Disadvantages:
- role of “corporate citizenship”
Examples of corporations (3)
Hewlett-Packard
Intel
Walt-Disney
The Nader view
Ralph Nader believes that businesses have ethnic and social responsibilities
the Friedman view
Milton Friedman believes in increasing profits so long as everything he does is within the rules of the game - open and free competition without deception or fraud
Asymmetric information
Exists when one party has information that another party to a transaction doesn’t have
Where will firms relocate?
Similar firms have an incentive to locate near each other. They do this for the competition of customers.
General partners
Partners who are responsible for the management of the firm
- unlimited liability
Limited partner
Restricted to the amount he or she has invested in the firm
- doesn’t usually participate in the management of the firm or enter contracts on behalf of the firm
Perfect competition characteristics (4) and issues (1)
Characteristics:
- has many buyers and sellers
- sells identical products
- no asymmetrical information
- easy entry in and out of the market
Issues:
- sellers are price takers
Price takers
A seller that can sell all its output at the equilibrium price but can sell none of its output at any other price.
Examples of perfect competition (3)
*agriculture products (wheat, soybean, coffee, oranges, maple syrup)
Stocks or bonds
Gasoline
Monopolistic competition characteristics (3) and issues (2)
Characteristics:
- many buyers and sellers
- sells different or unique products
- there are few if any barriers to enter or exit the market
Issues:
- sellers are price makers (price searcher)
- sellers will use advertising to differentiate their products
Examples of monopolistic competition (5)
Athletic shoes (Nike, Adidas, reebok)
Fast food (McDonald’s, Burger King, Wendy’s)
Grocery stores (cub, rainbow, piggly wiggly)
Smartphones (Samsung, HTC, Apple, Nokia, etc)
Car producers (GM, Chrysler, Ford…)
Price maker (price searcher)
A seller that can sell some of its output at various prices
Oligopoly characteristics (3) and issues (1)
Characteristics:
- has a few sellers
- firms sell either identical or similar products
- many barriers to exit the market
Issues:
- sellers may try to collude; if seller collides, they can act as a cartel
Collude
Conspire to fix prices
Cartel
A group with monopoly power
- cartels don’t last long because there is too much incentive to cheat
Examples of an oligopoly? (5)
OPEC (Saudi Arabia, Libya, Venezuela)
Airline industry (American, United, Delta)
Broadcast tv (CBS, NBC, ABC, FOX)
Soda producers (coca cola, Pepsi)
Candy producers (Hershey’s, nestled, Mars)
Monopoly characteristics (3) and issues (2)
Characteristics:
- only has one seller
- has no close substitutes
- many barriers to enter or exit market
Issues:
- price makers (they choose price)
- Sherman antitrust act
Sherman antitrust act
Outlawed monopolies in the U.S. in 1890
Government monopoly
Government sanctioned monopolies
- patent
- copyright
Patent
Format of intellectual property granted to an inventor by government for a stipulated time period
Copyright
Form of intellectual property granted to an author or artist by government for a stipulated time period
Natural monopoly
A business that can produce at an unusually low cost
- In many cases, monopolies have exclusive ownership of a resource
Output =
When MC (marginal cost) = MR (marginal revenue)
- also when profits are maximized!
Profit (or loss) =
TR (total revenue) - TC (total cost)
MC =
TC₂-TC₁ = MC
TR =
MR x Q
