question
firm
answer
an institution that hires factors of production (inputs: land, labor and capital) and organizes those factors of production to produce and sell goods and services (outputs)
question
implicit costs
answer
sum of all hidden opportunity costs forgone, but not paid in real money
does not require an actual expenditure of real money
implicit rental rate--opportunity cost of using own capital = economic depreciation and forgone interest
cost of owner's resources--wage income foregone + normal profit
does not require an actual expenditure of real money
implicit rental rate--opportunity cost of using own capital = economic depreciation and forgone interest
cost of owner's resources--wage income foregone + normal profit
question
explicit costs
answer
costs that are borne directly by the use of the factors of production. paid in real money
question
conventional depreciation
answer
a fall in the value of a firm's capital over time.
question
accounting profit
answer
total revenue minus explicit costs and conventional depreciation, with revenue equaling quantity sold times price
reveals if a firm is earning enough revenue to pay for its expenses.
ensures firms pay the correct amount of taxes
show investors how their funds are being used
reveals if a firm is earning enough revenue to pay for its expenses.
ensures firms pay the correct amount of taxes
show investors how their funds are being used
question
economic profit
answer
total revenue minus total cost, with total cost measured as the opportunity cost of production (both explicit and implicit costs)
question
firm's opportunity cost of production
answer
the value of the best alternative use of the resources that a firm uses in production, which is comprised of both implicit and explicit costs.
tallies the cost of resources
bought in the market,
owned by the firm and
supplied by the firm's owner.
tallies the cost of resources
bought in the market,
owned by the firm and
supplied by the firm's owner.
question
implicit rental rate of capital
answer
The firm's opportunity cost of using the capital it owns
made up of
1. Economic depreciation - the change in the market value of capital over a given period.
2. Interest forgone - the return on the funds used to acquire the capital.
made up of
1. Economic depreciation - the change in the market value of capital over a given period.
2. Interest forgone - the return on the funds used to acquire the capital.
question
normal profit
answer
the cost of entrepreneurship
an opportunity cost of production
profit that an entrepreneur can expect to receive on
average
an opportunity cost of production
profit that an entrepreneur can expect to receive on
average
question
To maximize profit, a firm must make five basic decisions
answer
1. What to produce and in what quantities?
2. How to produce?
3. How to organize and compensate its managers and workers?
4. How to market and price its products?
5. What to produce itself and what to buy from other firms?
2. How to produce?
3. How to organize and compensate its managers and workers?
4. How to market and price its products?
5. What to produce itself and what to buy from other firms?
question
The firm's profit is limited by three features of the environment:
answer
1. Technology constraints
2. Information constraints
3. Market constraints
2. Information constraints
3. Market constraints
question
technological efficiency
answer
when a firm uses less of at least one input and no more of the other inputs to produce a given quantity of output
If it is impossible to produce a given good by decreasing any one input, holding all other inputs constant, then production is technologically efficient.
If it is impossible to produce a given good by decreasing any one input, holding all other inputs constant, then production is technologically efficient.
question
economic efficiency
answer
occurs when the firm produces a given quantity of output at the least cost.
depends on the relative costs of capital and labour
depends on the relative costs of capital and labour
question
A firm organizes production by combining and coordinating productive resources using a mixture of two systems:
answer
1. Command systems
2. Incentive systems
2. Incentive systems
question
command system
answer
uses a managerial hierarchy. Commands pass downward through the hierarchy and information (feedback) passes upward. These systems are relatively rigid and can have many layers of specialized management.
firms use commands when it is easy to monitor performance or when a small deviation from the ideal performance is very costly.
firms use commands when it is easy to monitor performance or when a small deviation from the ideal performance is very costly.
question
incentive system
answer
a method of organizing production that uses a market-like mechanism to induce workers to perform in ways that maximize the firm's profit.
firms use incentives whenever monitoring performance is impossible or too costly to be worth doing.
firms use incentives whenever monitoring performance is impossible or too costly to be worth doing.
question
principal-agent problem
answer
the problem of devising compensation rules that induce an agent to act in the best interests of a principal.
three ways of coping with the principal-agent problem
Ownership
Incentive pay
Long-term contracts
three ways of coping with the principal-agent problem
Ownership
Incentive pay
Long-term contracts
question
three types of business organization
answer
Sole proprietorship
Partnership
Corporation
Partnership
Corporation
question
sole proprietorship
answer
a firm with a single owner who has unlimited liability, or legal responsibility for all debts incurred by the firm — up to an amount equal to the entire wealth of the owner.
makes management decisions and receives the firm's profit. Profits are taxed the same as the owner's other income.
pros and cons:
Are easy to set up
Managerial decision making is simple
Profits are taxed only once as owner's income
Bad decisions made by the manager are not subject to review
The owner's entire wealth is at stake
The firm dies with the owner
The cost of capital and labour can be high
makes management decisions and receives the firm's profit. Profits are taxed the same as the owner's other income.
pros and cons:
Are easy to set up
Managerial decision making is simple
Profits are taxed only once as owner's income
Bad decisions made by the manager are not subject to review
The owner's entire wealth is at stake
The firm dies with the owner
The cost of capital and labour can be high
question
partnership
answer
a firm with two or more owners who have unlimited liability. Partners must agree on a management structure and how to divide up the profits.
Profits are taxed as the personal income of the owners
pros and cons:
Are easy to set up
Employ diversified decision-making processes
Can survive the withdrawal of a partner
Profits are taxed only once
Achieving a consensus about managerial decisions is difficult
Owners' entire wealth is at risk
Capital is expensive
Profits are taxed as the personal income of the owners
pros and cons:
Are easy to set up
Employ diversified decision-making processes
Can survive the withdrawal of a partner
Profits are taxed only once
Achieving a consensus about managerial decisions is difficult
Owners' entire wealth is at risk
Capital is expensive
question
corporations
answer
owned by one or more stockholders with limited liability, which means the owners have legal liability only for the initial value of their investment.
profit is taxed twice — once as a corporate tax on firm profits, and then again as income taxes paid by stockholders receiving their after-tax profits distributed as dividends.
pros and cons:
Limited liability for its owners
Large-scale and low-cost capital that is readily available
Professional management
Lower costs from long-term labour contracts
Complex management structure may lead to slow and expensive decision making
Profits taxed twice—as corporate profit and shareholder income
profit is taxed twice — once as a corporate tax on firm profits, and then again as income taxes paid by stockholders receiving their after-tax profits distributed as dividends.
pros and cons:
Limited liability for its owners
Large-scale and low-cost capital that is readily available
Professional management
Lower costs from long-term labour contracts
Complex management structure may lead to slow and expensive decision making
Profits taxed twice—as corporate profit and shareholder income
question
four general market types
answer
1. Perfect competition
2. Monopolistic competition
3. Oligopoly
4. Monopoly
2. Monopolistic competition
3. Oligopoly
4. Monopoly
question
perfect competition
answer
a market structure with
Many firms and many buyers
All firms sell an identical product
No restrictions on entry of new firms to the industry
Both firms and buyers are all well informed about the prices and products of all firms in the industry
Examples include world markets in wheat, corn, and other grains.
Many firms and many buyers
All firms sell an identical product
No restrictions on entry of new firms to the industry
Both firms and buyers are all well informed about the prices and products of all firms in the industry
Examples include world markets in wheat, corn, and other grains.
question
monopolistic competition
answer
a market structure with
Many firms and many buyers
Each firm produces similar but slightly different products—called product differentiation
Each firm possesses an element of market power
No restrictions on entry of new firms
Some examples include pizza restaurants, male and female clothing, fragrances, etc.
Many firms and many buyers
Each firm produces similar but slightly different products—called product differentiation
Each firm possesses an element of market power
No restrictions on entry of new firms
Some examples include pizza restaurants, male and female clothing, fragrances, etc.
question
oligopoly
answer
a market structure in which
A small number of firms compete
The firms might produce almost identical products or differentiated products
Barriers to entry limit entry into the market
There arises the need for firms to use strategic behaviour models (game theory)
Some examples include automakers, brewers, air craft construction, etc.
A small number of firms compete
The firms might produce almost identical products or differentiated products
Barriers to entry limit entry into the market
There arises the need for firms to use strategic behaviour models (game theory)
Some examples include automakers, brewers, air craft construction, etc.
question
monopoly
answer
a market structure in which
One firm produces the entire output of the industry
There are no close substitutes for the product
There are barriers to entry that protect the firm from competition by entering firms
One example is the home telephone market before cell phone technology (i.e., Bell Canada) or a local utility.
One firm produces the entire output of the industry
There are no close substitutes for the product
There are barriers to entry that protect the firm from competition by entering firms
One example is the home telephone market before cell phone technology (i.e., Bell Canada) or a local utility.
question
four-firm concentration ratio
answer
the percentage of the total industry sales accounted for by the four largest firms in the industry.
A monopoly has a concentration ratio of 100 percent—the largest
(and only) firm has 100 percent of the sales. A four firm concentration ratio that exceeds 60 percent is regarded as an indication of a market that is highly concentrated and dominated by a few firms in an oligopoly. A ratio of less than 60 percent is regarded as an indication of a competitive market.
A monopoly has a concentration ratio of 100 percent—the largest
(and only) firm has 100 percent of the sales. A four firm concentration ratio that exceeds 60 percent is regarded as an indication of a market that is highly concentrated and dominated by a few firms in an oligopoly. A ratio of less than 60 percent is regarded as an indication of a competitive market.
question
Herfindahl-Hirschman Index
answer
the square of percentage market share of each firm summed over the largest 50 firms in the industry
less than 1,500 --competitive.
between 1,500 and 2,500 —a form of monopolistic competition.
exceeds 2,500 --uncompetitive
10,000-monopoly
less than 1,500 --competitive.
between 1,500 and 2,500 —a form of monopolistic competition.
exceeds 2,500 --uncompetitive
10,000-monopoly
question
main limitations of only using concentration measure as determinants of market structure
answer
1. geographical scope
2. barriers to entry and firm turnover
3. correspondence between market and industry
2. barriers to entry and firm turnover
3. correspondence between market and industry
question
short run
answer
a time frame where at least one factor of production is fixed.
For the majority of firms, capital, land, and entrepreneurship are fixed over the short run. (the firm's plant)
labour in the short run is commonly referred to as the variable resource.
For the majority of firms, capital, land, and entrepreneurship are fixed over the short run. (the firm's plant)
labour in the short run is commonly referred to as the variable resource.
question
long run
answer
a time frame in which all factors of production can vary
usually very difficult to reverse
involve sunk costs
usually very difficult to reverse
involve sunk costs
question
sunk costs
answer
past expenditures on a plant that has no resale value to the firm
unrecoverable costs so not relevant in a firm's decision-making process
unrecoverable costs so not relevant in a firm's decision-making process
question
total product
answer
total output produced in a given period.
question
marginal product of labor
answer
the change in total product that results from a one-unit increase in the quantity of labour employed, with all other inputs remaining the same.
question
average product of labour
answer
equal to total product divided by the quantity of labour employed
question
increasing marginal returns
answer
arise from increased specialization and division of labour
experienced initially when firms hire extra labour
experienced initially when firms hire extra labour
question
decreasing marginal returns
answer
arises because each additional worker has less access to capital
and less space in which to work.
experienced eventually when firms hire extra labour
and less space in which to work.
experienced eventually when firms hire extra labour
question
law of diminishing returns
answer
As a firm uses more of a variable input with a given quantity of fixed inputs, the marginal product of the variable input eventually diminishes.
question
relationship between the average product curve and the marginal product curve
answer
When marginal product exceeds average product, average product increases.
When marginal product is below average product, average product decreases.
When marginal product equals average product, average product is at its maximum.
When marginal product is below average product, average product decreases.
When marginal product equals average product, average product is at its maximum.
question
Total cost (TC)
answer
cost of all resources used
question
Total fixed cost (TFC)
answer
the cost of the firm's fixed inputs. Fixed costs do not change with output.
question
Total variable cost (TVC)
answer
the cost of the firm's variable inputs. Variable costs do change with output.
question
Marginal cost (MC)
answer
increase in total cost that results from a one-unit increase in total product.
calculated as the change in total cost divided by the change in total output.
Over the output range with increasing marginal returns, marginal cost falls as output increases.
Over the output range with diminishing marginal returns, marginal cost rises as output increases.
calculated as the change in total cost divided by the change in total output.
Over the output range with increasing marginal returns, marginal cost falls as output increases.
Over the output range with diminishing marginal returns, marginal cost rises as output increases.
question
position of a firm's cost curves depend on two factors:
answer
Technology--change in cost curves (TC, AC, MC)and production curves (TP, AP, MP)
Prices of factors of production
Prices of factors of production
question
production function
answer
the relationship between the maximum output attainable
and the quantities of both capital and labour
determines the behaviour of long-run cost
and the quantities of both capital and labour
determines the behaviour of long-run cost
question
marginal product of capital
answer
the increase in output resulting from a one-unit increase in the amount of capital employed, holding constant the amount of labour employed
question
long-run average cost curve (LRAC)
answer
the relationship between the lowest attainable average total cost and output when both the plant and labour are varied.
made up from the lowest ATC for each output level. When a firm is producing a given output at the least possible cost, it is operating on its long-run average cost curve .
made up from the lowest ATC for each output level. When a firm is producing a given output at the least possible cost, it is operating on its long-run average cost curve .
question
economies of scale
answer
features of a firm's technology that lead to falling long-run
average cost as output increases. Greater specialization of both labour and capital is the main source of economies of scale.
average cost as output increases. Greater specialization of both labour and capital is the main source of economies of scale.
question
diseconomies of scale
answer
features of a firm's technology that lead to rising long-run average cost as output increases The challenge of managing a large enterprise is the main source of diseconomies of scale.
question
constant returns to scale
answer
features of a firm's technology that lead to constant long-run average cost as output increases LRAC is horizontal
question
minimum efficient scale
answer
the smallest quantity of output at which the long-run average
cost reaches its lowest level. If the long-run average cost curve is U-shaped, the minimum point identifies the minimum efficient scale output level.
cost reaches its lowest level. If the long-run average cost curve is U-shaped, the minimum point identifies the minimum efficient scale output level.
question
Firm coordination advantages over market coordination
answer
lower transaction costs
economies of scale
economies of scope
economies of team production
economies of scale
economies of scope
economies of team production
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
