Econ Ch.20-23 - Chapter 20 Costs and the Supply of Goods 1...

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Chapter 20 Costs and the Supply of Goods 1. Why are business firms used by societies everywhere to organize production? - Business firms are designed to organize raw materials, labor, and machines with the goal of producing goods and/or services. Firms (1) purchase productivity resources from households and other firms, (2) transform them into a different commodity, and (3) sell the transformed product or service to consumers. Every society relies on business firms to organize resources and transform them into products. 2. How are firms organized in market economies? - Firms in market economies are organized in one of three ways: 1. Proprietorship 2. Partnership 3. Corporation 2. What are the pros and cons of the different firm organizational structures? - 3. What factors motivate corporate management to minimize costs? - There are three major factors that motivate corporate management to minimize cost 1. Competition among firms for investment funds and consumers. 2. Compensation and management incentives. 3. The threat of corporate takeover. 4. What are explicit and implicit costs, and how do they impact the firm? - Explicit costs are payments by a firm to purchase the services of productive resources. - Implicit costs are the opportunity costs associated with a firm’s resources that it owns. These costs do not involve a direct money payment. Examples include wage income and wage forgone by the owner of a firm who also provides labor services and equity capital to the firm. 5. How does economic profit differ from accounting profit? Why is this difference important? - Economic profit is its total revenue minus the costs, including both the explicit and implicit cost components. - Accounting profit is the sales revenue minus the expenses of a firm over the designated time period, usually one year. Accounting profits typically make allowances for changes in the firm’s inventories and depreciation of its assets. No allowance is made, however, for the opportunity cost of the equity capital of the firms owners, or other implicit costs. - These differences are important because accounting profits approximate the returns to the firm’s equity capital 6. How will increases in output influence product cost in the short run?
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Why is this the case? - Increases in output will influence product cost in the short run by over utilization, this will mean congestion or time spent by workers waiting for machines and similar costly delays. When diminishing marginal returns are present, successively larger amounts of variable input will be required to increase output by one more unit. As this happens marginal cost will rise. - This is the case because requiring output beyond the least-cost, or designed, output of a plant will lead to high marginal cost and therefore to high average total cost.
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