Introducing supply decisions

Question 1

What’s a sole trader?

Answer 1

owned by an individual; entitled to income and responsible for losses
e.g corner shop

Question 2

What’s a partnership?

Answer 2

Jointly owned by two or more people
unlimited liability
e.g John Lewis, law and accountancy firms

Question 3

What is a company?

Answer 3

. Ownership divided among shareholders-private or public
. legal entitlement to produce and trade
. limited liability
. shares of public companies resold on the stock exchange
e.g plcs= shell, apple

Question 4

What is a stock account compared to a flow account?

Answer 4

. Stocks are measured at a point in time

. Flows are corresponding measures during a period of time

Question 5

What is revenue?

Answer 5

the amount a firm earns by selling goods and services in a given period
R=P X Q for one time of good

Question 6

What are costs?

Answer 6

the expenses incurred in producing goods and services during the period
c=ac x q

Question 7

What are profits?

Answer 7

the excess of revenues over costs

profit = R - C

Question 8

What is cash flow?

Answer 8

the net amount of money received (by the firm) during the accounting period

Question 9

What is physical capital?

Answer 9

machinery, equipment and buildings used in production

Question 10

What is depreciation?

Answer 10

the loss in value of a capital good during the accounting period

Question 11

What are inventories?

Answer 11

goods held in stock by the firm for future sales

Question 12

What are assets and liabilities?

Answer 12

. Assets
what the firm owns
. Liabilities
what the firm owes

Question 13

What is a firms net worth?

Answer 13

Assets - liabilities

Question 14

What is a firms balance sheet?

Answer 14

lists a firm’s assets and liabilities at a point in time

Question 15

What is an accounting cost?

Answer 15

Actual payments made by a firm in a period

Question 16

What is an opportunity cost?

Answer 16

Amount lost by not using a resource in its best alternative use. Economists include this in a firms total costs but accountants do not

Question 17

What is an economic cost?

Answer 17

Relates to all the costs incurred by the firm. They include the opportunity costs of all resources used in production.

Question 18

What is a supernormal profit?

Answer 18

Supernormal profit is the pure profit accruing to the owners after allowing for all economic costs.

Question 19

A firm sells carpets for £10m a year.
The cost of buying in materials is £5m.
Its labour costs £2m a year.

It also employs £10 m of capital, bearing 10% interest and 10% depreciation a year.

What (if anything) is the firm’s profit and supernormal profit?

Answer 19

profit each year = £3m

supernromal profit each year= £1m

Question 20

What is corporate finance?

Answer 20

How firms finance their activities?

Question 21

What differnet types of corporate fiance are there?

Answer 21

1) Borrowing from banks
2) Borrowing by selling pieces of paper (corporate bonds) whereby the firm promises to pay interest for a specified period and then repay the debt
3) Using the stock market for selling new shares in the firm

Question 22

What is the UK and US system compared top the German system?

Answer 22

. US and the UK have market-based or outsider systems, relying on active stock markets trading existing shares and debt, and available to issue new shares and debt
. Germany have an insider system. Companies got long-term loans from banks, who then sat on company boards with access to inside information about how the firm was doing

Question 23

What will a profit maximising firms production decision be?

Answer 23

For any output level, the firm attempts to minimize costs which in turn hopefully increases profit.

Question 24

What is marginal cost and marginal revenue?

Answer 24

Marginal cost (MC) is the rise in total cost if output increases by 1 unit.
Marginal revenue (MR) is the rise in total revenue if output increases by 1 unit.

Question 25

How do you work out profit from selling an extra unit?

Answer 25

MR-MC

Question 26

Explain the shape of a MC curve?

Answer 26

. MC may be high to start because of fixed costs (set up factory?)
. MC then falls
. And then rises.
. It intersects AC at AC’s lowest
point and continues to rise as larger larger firms are diffivult to manage. Increaseing output gets harder and marginal costs rise

Question 27

Explain and state why the shape of the MR curve

Answer 27

. Falls steadily for two reasons
. 1) demand curves slope down so extra output must be sold at a lower price
2) successive price reductions reduce the revenue earned from existing units of output
.

Question 28

How can firms use MR and MC to decide how to maximise profits?

Answer 28

. If MR > MC, an increase
in output will increase
profits.
. If MR < MC, a decrease
in output will increase
profits.
. So profits are maximized 
when MR = MC at Q1

Question 29

What will happen with an increase in demand e.g increased customers in the market, to the interaction between MR and MC curves?

Answer 29

. MR shifts rightward.
the intersection of MR and MC also moves right
. so firms optimal level of output also increases

Question 30

Will firms actually try to maximize profits?

Answer 30

. Large firms are not run by their owners
there is separation of ownership and control
. Managers may pursue different objectives
e.g. size, growth
. But firms not maximizing profits may be vulnerable to takeover
or managers may be given share options to influence their incentive to maximize profits