Midterm 2 Content Part 2 Flashcards
What are explicit costs?
Resources bought or hired on the market
What must happen in order for a cost to be explicit?
money must change hands.
wages to workers.
paying for inputs
What are implicit costs?
costs where money does not change hands.
What are the two categories of implicit costs?
- Opportunity cost of capital resources by firms
2. OC of “labor” resources supplied by owner
Implicit rental rate of capital has which categories?
- forgone interest on owner’s funds
2. Economic depreciation on capital equipment
What’s an example of forgone interest on owner’s funds?
take money out of savings–no interest–economist thinks this has an opportunity cost
$ not in savings– forgone interest– no money changed hands
Whats an example of Economic depreciation on capital equipment?
rent computers–rental company sustains depreciation
depreciation- equipment wears out
everyday the machine is used the value depreciates
What is an example of lost wages and salaries for labor supplied by the owner?
- wages you could have gotten working for someone else
What is an example of Opportunity cost of owner’s entrepeneurship?
opportunity cost of entrepreneurship
management talent to your firm OC $ for running someone else’s company
What implicit cost does an accountant pay attention to?
depreciation -THIS WILL AFFECT THE COMPUTATION OF PROFIT
How do firms figure their costs and profits?
- economists consider costs in an opportunity cost sense
* There’s a distinction between economic and accounting costs and economic and accounting profit
Why doesn’t an account regard all of the implicit costs?
not cost deductible
How is economic profit calculated?
TR- Total Economic Cost
where economic cost includes all implicit costs.
Economic costs can be ____than accounting cost meaning?
greater
ECONOMIC PROFIT MAY BE LESS THAN ACCOUNTING PROFIT
What are the three major types of business organizations?
- Proprietorship
- Partnership
- Corporation
(CPP)
A proprietorship has _____________
which extends to_____–
unlimited liability
this extends to personal assets
single person/ unit start a business-profit goes to a single owner, profit to single owner
if business fails and debts are incurred– creditors can take home, car, anything that is valuable.
What are the three different kinds of partnerships?
- Traditional
- Limited partnership
- Limited liability partnership
What does a traditional partnership entail?
each partner has joint unlimited liability
each partner liable w/o limit for all debts contracted by partnership friend- owns 90%, gets 90% of the profit-but if business fails you’re responsible for 100% of the money.
What is limited partnership?
“limited” partners don’t have unlimited liability but they also have no say in running the firm
-can only loose the money that they put into the business- can’t make operational decisions- want investors – gray area when someone does help with the decisions
What is a limited liability partnership?
- one partner is not liable for misconduct of another partner
- all partners have a say
ex: if there is debt because of embezzlement- “not liable” for losses
What are some features of a corporation?
- limited liability
- corporation can be sued as a legal entity
What is a disadvantage of a corporation?
multiple layers to taxes, subjected to more
Corporate profits tax plus income tax on dividends and capital gains tax for shareholders.
What is a Limited Liability Company?
- limited liability - loose $ invested, loose shares
- can pass through taxes to personal income taxes
- tax dodge
What is a S corporation?
owner takes part of return as wage and part as profit. Avoid SSI taxes
How is industry percentage divided between Corps, Partnerships, Proprietorships?
corps -20%
partnerships-4%
proprietorships- 75%
90% of revenue comes from?
Corporations
What are the 4 degrees on the Market Structure Spectrum?
- Perf Competition 2. Monopolistic Competition 3. Oligopoly
4. Monopoly
How can market power be calculated?
- Conc ratio
2. Herfindahl- Hirschman Index
What is concentration ratio?
A measure of market power
fraction of the total market sales controlled by the industry’s largest firms
-top 4 firms in order of sales-see what fraction is accounted for
What is the HHI index?
the square of the percentage market share for each firm summed over the largest 50 firms
if only four
HHI=50^2+25^2+15^2
What is a variable resource?
ones that can be varied quickly and easily to increase or decrease output within a production unit (or plant of a given size)
What is an example of a variable resource?
labor
What is a fixed resource?
- ones that cant be varied quickly or easily
- the quantity of fixed resources determines the size of the plant
- the collection of fixed resources is the firm’s plant
What is an example of a fixed resource?
Capital
factory, machinery,
-determines size of production unit
can’t vary quickly and easily
Short run?
long enough to alter the variable but not the fixed resources for production
Long-run?
long enough to alter both the variable and the fixed resources for production
Are there fixed resources in the long run?
No-everything can be altered in the long run.
T/F There is a particular amount of time attached to the long/ short run?
False- length in time varies for each industry
simple industry- shoe repair- can double the size quicky- rent the space next to you- new equipment can be bought quickly. (maybe 1 month)
1 month -complex- steel industry-new furnace needed- long time is required
What is industry?
- all the firms in one line of business
- each firm can have a number of plants
What is the hierarchy within an industry?
plants: factory, equipment
firm: lots of plants, plants together- firms (create same one product)
firms: form industry
What is a sunk cost?
- an asset that has no resale value, can’t recycle for raw materials, no used market=NO OPPORTUNITY COST.
-it’s zero because there is no alternative option
shouldn’t influence a business decision about what is currently the most profitable thing to do–shouldn’t influence a production decision
Short run cost is a ________concept? why?
short run concept
most things can be recycled in the long run
What is the difference between psychologists and economists in terms of sunk cost?
- Psychologists-ticket to concert-1hr to get there-go w/o ticket-left at home and can’t get it back in time= you are paying 2X as much for the ticket now
- economists-forget the sunk cost you are only paying the original amount for the ticket
What is a production function?
-A technical, mathematical relationship that tells the maximum amount of output that can be produced with a given set of inputs-given the current state of technical knowledge
TR=f(capital, land, labor)
What is average product? How is it calculated?
-product per unit of an input factor
AP of labor: Total Product/# of labor inputs
AP of capital: Total Product/# of capital inputs
What is marginal product? How is it calculated?
-The change in total product that comes from using an additional unit of a factor
MPL=change in Total product/ change in labor.
this is adding another worker and seeing how the product changes
What does productivity measure?
Average product of labor (output per worker)
