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Exam 2 Outlines

Exam 2 Outlines - Exam 2 Outlines UNIT 5 FIRM BEHAVIOR AND...

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Exam 2 Outlines UNIT 5: FIRM BEHAVIOR AND THE ORGANIZATION OF INDUSTRY CHAPTER 13: THE COSTS OF PRODUCTION 1. Sole Proprietorship: 80% In U.S. o Mom/pop stores o A lot of sole proprietorships turn into corporations when they grow with success (+) (-) o Easy (taxes, startup) liability (sued) o Profits (don’t share) no time off o You make decisions- own boss hard to compete o Hard to raise $ 2. Partnership: 8% (+) (-) o Specialize liability o Down-time contention between partners o Start-up costs 3. Corporation (+) (-) o Limited liability 2x taxation (net income/dividends) o Easy to raise $ deal with stockholders o Stockholder votes Industrial organization: the study of how firms’ decisions about prices and quantities depend on the market conditions they face WHAT ARE COSTS? I. Total Revenue, Total Cost, and Profit 1) Total revenue : the amount a firm receives for the sale of its output 2) Total cost : the market value of the inputs a firm uses in production 3) Profit : total revenue minus total cost i. Objective is to make firm’s profit as large as possible When there is a net loss instead of profit o Raise price- difficult to do Smart companies do it with out actually raising price Ex: less product in same package o Reduce costs o Varied costs/fixed costs Business starters objective is to make their firm’s profit as large as possible o 12 of 13 starter businesses in Salt Lake fail within the first 6 months because they don’t have enough capital to support it
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II. Costs as Opportunity Costs 1) When figuring total costs, have to add opportunity costs as well 2) Explicit costs : input costs that require an outlay of money by the firm i. Employees wages 3) Implicit costs : input costs that do not require an outlay of money by the firm i. Cost of flour III. The Cost of Capital as an Opportunity Cost 1) Example: Helen uses $300,000 from savings for cookie shop, if left on 5% interest would earn $15,000 a year, which is an implicit opportunity, cost. 2) Economists and Accountants view costs differently i. Accountants only look at explicit costs- $ inflow and outflow ii. Economists look at all costs including opportunity costs and implicit IV. Economic Profit versus Accounting Profit 1) Economic profit : total revenue minus total cost, including both explicit and implicit costs i. Measured by economists 2) Accounting profit : total revenue minus total explicit cost i. Measured by accountants- usually larger profit PRODUCTION AND COSTS V. The Production Function 1) Production function : the relationship between quantity of inputs (employees) used to make a good and the quantity of output (cookies made) of that good i. Slope of production function measures the marginal product of a worker ii. As the number of workers increases, the marginal product declines, and the production function becomes flatter.
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