Econ Unit 3
Total product of labor (TPL)
"output"; the total output produced by labor, holding capital fixed hiring (x amount of people and they make x amount of money)
Limited Liability Partnerships (LLP's/LLC's)
- Individual has unlimited liability - Ability to take advantage of specialization - Potential for conflict: they fight all the time over money
Disadvantages of corporations
- double taxation - corporations are complicated to set up
Advantages of a Sole proprietorship
- easy to form and to dissolve - all decision- making power resides with the sole proprietor - profit is taxed only once !!!!
Advantages of Corporations
- owners (stockholders) have limited liability - unlimited longevity - usually able to raise large sums of money by selling more stock, providing funding for expansion- 3 ways
Disadvantages of a partnership
- partner face unlimited liability (one partner can incur a debt and all partners are legally responsible for payment of debt) - Decision making can be complex and frustrating
Advantages of partnerships
- profit is taxed only once !!!!
Disadvantages of a Sole proprietorship
- proprietor faces unlimited liability - limited ability to raise funds for business expansion - usually ends with retirement of death of proprietor
Two questions firms should ask
1. How much should we produce? 2. What price should we charge?
Two ways in which a business can grow and expand
1. Reinvest profits in new plants and equipment 2. Merger (two types)
What price should we charge?
A company must know exactly how much they need to produce in order to maximize their profit
Common stock (corporation issues it)
A person that owns this stock has voting privileges (any common person can buy it, we get to vote on Board of Directions- if company goes under, lose everything)
______ helps determine how much you need to charge in order to make a profit
Average total cost
Sole proprietorship
Business owned by one person - barbershop - carpet cleaning services
Marginal product (MPL) =
Change in Q / Change in L
Two types of stock corporations issues
Common Preferred
How much should we produce?
Companies will continue to produce goods as long as their marginal revenue is greater than their marginal cost (MR=MC... is how much you should produce to maximize your profit) - Maximizing profit is the same as getting the largest possible difference between total revenue and total cost
Preferred stock (corporation issues it)
DO NOT have the right to vote on Board of Directions- reason called preferred is stock; safety investment; does not loose everything- gets original investment back (give up right to vote to gain liability)
Total cost =
FC+VC
Limited Partnerships (Silent partner[s])
Financial backers (Shark tank) - Larger the risk the better the term - Backer only has unlimited liability for money that he started with- everything else is liable to company owner
Five types of costs are associated with the production of goods
Fixed cost Variable cost Total cost Average total cost Marginal cost
Corporations
Formal, legal entity all its own - treated as if they are a sole proprietorships
Three types of partnerships
General Partnerships Limited Partnerships Limited Liability Partnerships
Two types of mergers
Horizontal merger Vertical merger
Best of the three partnerships
Limited Liability Partnerships
Used to determine how many workers you should hire
MPL
Where will firms locate?
Next to competitors (getting off at an exit where there are multiple gas stations and foods so you have choices) car dealerships
Total revenue =
Price x Quantity of food sold
TR=
Price x quantity
Profit is always In ____ in parenthesis with ______
Red no negative signs
Three types of firms
Sole proprietorship Partnership Corporation
Average total cost
TC/quantity
Profit (or loss) =
TR - TC
#1 disadvantage for sole proprietors
Unlimited liability
Partnership
a business owned by 2 or more co-owners, called parters, who share profits and are legally responsible for debts
Sale 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 legally responsible for the debts of the firm
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)
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
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 a stock in a corporation
Board of Directors
an important decision making body in a corporation. It decides corporate policies and goals, among other things
Business firm
an organization that uses resources to produce goods and services that are sold to consumers, other firms, or the government
Asset
anything of value to which the firm has a legal claim
Assets
are anything of value to which the firm gas a legal claim
A share of stock represents a claim on the ____ of a corporation
assets
Ralph Nadir
believed that a company can grow and expand by taking care of the company and employees (all businesses have ethical and social responsibilities)
Loss is always in _____ in parenthesis with _____
black no negative signs
Business firms need _____ and _______: people who give the orders and people who carry out the orders.
bosses and employees
Most _______ exist because a group of people working together can be more effective than a group of people working individually. Brings groups of people together to make the production more efficient thus not allowing us to loose resources
businesses - We get a cheaper product - We get a better product
Horizontal merger
buying out competition; ATAT buying out bell south, southwest airlines merging with AirTran (growing horizontally)
Vertical merger
buying out parts for the competition; McDonalds bought Fancy Ketchup and changed the packaging (stacking their business vertically)
Variable cost
changes with the number of units of a good produced. Ex) air conditioning= more expensive in the summer; tomatoes, sausage, cheese, etc.
If a corporation is approved, the government issues a ______ stating the purpose of the business, specifying the number of shares of stock, and other business information
charter
Unlimited longevity
continues even after the owner dies. Ownership is transferable (corporation)
In a _____ individuals who wish to incorporate must file with the national government and state where the business will have its headquarters • Takes around 7-9 years • Costs thousands of dollars
corporation
Fixed cost
cost or expenses that is the same no matter how many units of a good are produced. Ex) building rent
Corporations pay out ______ to shareholders when the corporations become profitable
dividends
MC> MR
do NOT produce
An example of a LLP's/LLC's
doctor's office: all costs are divided by the five doctors that work there. Doctors get ALL the money from their patients. Law suits don't apply to the whole company, just the one doctor being sued, if forced to quit then the whole business doesn't go under and they can just start looking for a new doctor
A franchise begins when a ______ pays an initial fee to use the name and sell the goods. The franchisee will pay a percentage of profits to the franchiser, and follow guidelines established be the franchiser. In return, the franchisee helps training employees, advertising, and other benefits.
franchisee
The entity that offers the franchise is the _____
franchiser McDonald's Corporation is the franchiser
Disadvantage of a corporation:
hard to start up and hard to tear down
Milton Friedman
he thinks that if you want to grow as a business, you need to focus on your business ONLY and use your resources most effectively to increase your profits - Make the best profit it is and sell it for the cheapest price... goal is to make something you will actually use
Marginal cost
how a company maximizes its profit: cost of producing an additional unit of a good- that is, the change in total cost that results from producing an additional unit of output - Going from 10 pizzas to 11 pizzas... whatever is the cost to make the additional one is your marginal cost
Partnership
least numerous of the three types of business organizations (don't last long because of money conflicts - short longevity)
Articles of Partnership
legal papers that are usually signed in partnerships
MR=MC=
maximized profit
Limited liability
means that an owner can lose only the amount that she or he has invested in the firm.
Boss
must have the ability to hire and fire people. The threat of dismissal by the boss reduces shirking in a firm.
Business owners have to consider how the _____ of workers they hire will affect their total production
number
Stockholders
owners of the company
#1 disadvantage of a partnership
potential conflict on every decision- money fights
MR>MR=?
produce
Marginal Revenue
revenue from selling an additional unit of a good- that is, the change in total revenue that results from selling an additional unit of an output ➢ If I sell 100 pizzas at $12, the marginal revenue of the sell of the 101 pizza is $12
General Partnerships (50/50) (25/25/25/25)
share unlimited liability - Advantage: profits equal between them - Easier to get a loan
Most common (numerous firm)
sole proprietorship
The law of diminishing returns
states that if an additional units of one resource are added to another resource in fixed supply. Eventually the additional output will decrease (determines exactly how much product we need to make)
Total cost
sum of a fixed cost plus variable cost: Total cost= Fixed cost + variable cost (FC+VC= TC)
Double ______ is a major disadvantage of corporations
taxation
Franchiser
that entity that offers a franchise
Shrinking
the behavior of a worker who is putting forth less than the agreed-to effort
Marginal product of labor
the change in output from hiring one additional unit of labor, or worker
Franchisee
the person or group that buys a franchise
Corporations have _____ longevity
unlimited
3 different ways corporations can raise large sums of money by selling more stock, providing funding
• Sell Stock • Borrow money from banks • Issue corporate bonds