Econ Notes - Chapter 22: Rents, Profits, and the Financial...

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Chapter 22: Rents, Profits, and the Financial Environment of Business Economic Rent : payment to the owner of a resource in excess of its opportunity cost – the minimum payment that would be necessary to call forth production of that amount of the resource. Rent supply is completely inelastic. Supply curve for land was thought to be a vertical line (inelastic) Proprietorship: 72% of all firms in the US Owned by a single individual who makes the decisions Receives all profits Legally responsible for all debts Account for only 5 percent of all business revenue Pros of proprietorship: Easy to form and dissolve All decision making power resides with the sole proprietor No partners, shareholders, or board of directors need be consulted Profit is taxed only once All profit is treated by laws as the net income of the proprietor and as such is subject only to personal income tax Cons of proprietorship: Unlimited liability- (for the debts of the firm) Owner is personally responsible for all of the firm’s debts. Limited ability to raise funds- To expand the business or even simply to help it survive bad times. o Many lenders are reluctant to lend large sums to a proprietorship. Normally end with the death of the proprietor o Creates added uncertainty of the prospective lenders or employees. Partnership: Less numerous than proprietorships Larger than proprietorships o 2 or more co-owners (partners) Share responsibilities of operating the firm and profits Each is legally responsible for all of the debts incurred by the firm Annual sales about twenty times greater on average Pros of a partnership: Easy to form Reduce the costs of monitoring job performance
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o True for attorneys and physicians Permits more effective specialization in occupations Income of the partnership is treated as a personal income and thus is subject only to personal taxation Cons of partnership: Partners each have unlimited liability o Personal assets of each partner are at risk to debts incurred on behalf of the partnership by any of the partners Decision making is generally more costly o More people are involved in making decisions, and they may have differences in opinion that must be resolved Dissolution of the partnership is generally necessary when a partner dies or voluntarily withdraws or when one ore more partners wishes to remove someone from the partnership. Corporation: A legal entity that may conduct business in its own name just as an individual does Owners are called shareholders because they own shares of the profits earned by the firm o Enjoy limited liability If the corporation incurs debts that it cannot pay, the shareholders’ personal property is shielded from claims by the firms’ creditors. Account for more than 85 percent of all business revenues in the US
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This note was uploaded on 03/17/2008 for the course ECON 002 taught by Professor Mcleod,markpehlivan,ayseozg during the Fall '08 term at Pennsylvania State University, University Park.

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Econ Notes - Chapter 22: Rents, Profits, and the Financial...

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