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