unit 4 - Assignment Essays

question

firm

answer

owns, rents, and operates equipment, hires labor, and buys resources to use as inputs for production

question

main issues businesses face

answer

1. what consumers want
2. how to organize production
3. how to allocate resources
4. how to distribute its production

question

types of production

answer

output and profit

question

legal forms of business organizations

answer

1. sole proprietorship
2. partnerships
3. corporations

question

sole proprietorship

answer

one owner of the business

question

advantages of a sole proprietorship

answer

1. owner makes all of the decisions
2. easy to fulfill the legal requirements
3. rewards and profits go to the sole owner

question

disadvantages of a sole proprietorship

answer

1. resources are limited
2. liable for all the debts and obligations

question

partnership

answer

more than one owner of the business

question

advantages of a partnership

answer

1. owners share responsibility
2. specialization can happen for different aspects of the business
3. greater financial resources
4. easier to borrow money and establish credit

question

disadvantages of a partnership

answer

1. partners have to agree on the management and operation
2. each partner is liable

question

limited partner

answer

responsible only for the money directly invested into the firm and isn't involved in management

question

advantages of a corporation

answer

1. legally separate from the owners
2. easier to raise funds
3. investors receive ownership
4. isn't dissolved if the owner dies

question

investors

answer

receive shares of stock in exchange for the money invested; are voting members of the board of directors; receive dividends

question

dividends

answer

share of profits that investors receive

question

disadvantages of a corporation

answer

1. expensive and complex to organize
2. investors can't make management decisions
3. profits are taxed twice

question

double taxation

answer

corporation pays taxes on the firm's profits and individual investors pay personal income taxes on dividends

question

nonprofit organizations

answer

1. operate and provide goods and services
2. don't make a profit
3. exempt from paying taxes to the government

question

examples of nonprofits

answer

American Cancer Society; American Red Cross; religious groups

question

government

answer

1. provides goods and services
2. uses money from taxes

question

Decisions made by business makers

answer

1. How much to produce?/ How much output to supply?
2. How to produce?
3. How much of each input to demand?

question

explicit costs

answer

resources that a business demands; business owners exchange resources and semi-finished goods in order to finish the final product

question

examples of explicit costs

answer

buildings, raw materials, utilities, insurance, labor, equipment, business license, taxes

question

land

answer

rent

question

labor

answer

wages

question

capital

answer

interest

question

implicit costs

answer

costs of using your own resources without paying corresponding cash for payments

question

examples of implicit costs

answer

time or energy that could be spent on another business

question

3 measures of profit

answer

1. accounting profit
2. economic profit
3. normal profit

question

accounting profit formula

answer

total sales (-) explicit costs

question

accounting profit

answer

useful for accountants who are hired to determine the taxable income of the firm ; does not include implicit costs

question

economic profit formula

answer

total revenue (-) explicit and implicit costs

question

economic profit

answer

type of profit a firm wants; includes implicit costs to compensate for time an energy

question

if economic profit>1

answer

the sales receipts of the firms cover more than the opportunity cost of all the resources used; convinces firms to join an industry

question

if economic profit=0

answer

normal profit

question

normal profit

answer

firms stay in business; all the resources are receiving the same amount they would receive if used in their best alternative uses

question

if economic profit<1

answer

economic loss; firms may edit the industry or decrease production

question

short run

answer

amounts of at least one of the factors of production the firm uses can't be changed

question

variable factors

answer

resources that can be changed in the short run

question

fixed factors

answer

resources that can't be changed in the short run

question

long run

answer

all factors of production being used by the firm can be changed

question

marginal product

answer

the additional output created by the increase of one unit of input

question

increasing marginal returns

answer

when marginal returns increase as inputs increase

question

law of diminishing returns

answer

marginal product will continue to decline as more workers are hired

question

average product

answer

reflects the law of diminishing returns

question

AP product

answer

Total output/ # workers

question

ways MP affects AP

answer

1. MP>AP, +1 input causes AP to increase
2. MP<AP, +1 input causes AP to decrease

question

MP=0

answer

Total product is at its maximum

question

MP= negative

answer

Total product is falling

question

AP=MP

answer

AP is at its maximum

question

level of technology

answer

dictates the marginal and average product function for the firm

question

fixed costs

answer

don't change when output changes

question

examples of fixed costs

answer

lease; rent; payments; insurance; principal and interest on loans; garbage; utility bills

question

FC curve

answer

horizontal line

question

variable cost

answer

change as the level of output changes; increases when output increases

question

examples of VC

answer

number of workers; raw material used in the production process

question

total costs formula

answer

= total fixed costs (+) total variable costs

question

total cost

answer

shows a firm's short-run cost structure

question

answer

=FC+VC

question

variable cost curve

answer

shows the relationship between the firm's VC costs and the level of the firm's output

question

total cost curve

answer

parallel to the VC curve; starts at the FC curve

question

marginal cost

answer

additional cost incurred when the business produces one more product

question

marginal cost formula

answer

change in total cost/ change in quantity; Q always= 1; difference between successive total costs

question

Marginal cost curve

answer

decreases then eventually rises with output due to the law of diminishing marginal returns

question

average fixed costs

answer

FC/(Q or Output)

question

AFC curve

answer

falls as output rises -> "spreading the overhead"

question

average variable cost

answer

VC/(Q or O)

question

AVC curve

answer

similar in shape to VC curve; reflects the law of diminishing returns

question

average total cost

answer

AFC + AVC; TC/Q

question

distance between ATC curve and AVC curve

answer

AFC

question

when MC curve crosses the AVC curve

answer

AVC curve at its minimum

question

relationship between ATC and MC

answer

ATC declines as long as MC is below it; ATC rises as MC is above it

question

relationship between AVC and MC

answer

AVC declines when MC is below it; rises when MC is above it

question

long run cost

answer

all factors are variable and therefor all costs are variable; used to plan for the future

question

long run average total cost curve

answer

drawn with the short run average total cost curve at each level of output; connects the lowest portions of the short-run curves

question

cost envelope

answer

LRATC curve because it "hold" the lowest possible production cost at each level of output in the long run

question

economies and diseconomies of scale

answer

influence resource allocations and output decisions in the long run

question

economies of scale

answer

when a firm's growth leads to lower production costs per unit

question

effect of economies of scale

answer

the larger the economies of sale, the greater the advantage to a large firm

question

disadvantages of economies of scale

answer

smaller businesses may struggle to compete; larger firms that are fewer in number

question

constant returns to scale

answer

when firms tend to see their long-run average cost curve flatten out;

question

diseconomies of scale

answer

when a firm's growth leads to higher production costs per unit; set in when a firm continues to grow

question

why is the LRATC "U" shaped

answer

1. economies of scale-> slopes downward
2. constant returns to scale-> flattens out/ horizontal
3. diseconomies of scale -> slopes upward

1 of 82

question

firm

answer

owns, rents, and operates equipment, hires labor, and buys resources to use as inputs for production

question

main issues businesses face

answer

1. what consumers want
2. how to organize production
3. how to allocate resources
4. how to distribute its production

question

types of production

answer

output and profit

question

legal forms of business organizations

answer

1. sole proprietorship
2. partnerships
3. corporations

question

sole proprietorship

answer

one owner of the business

question

advantages of a sole proprietorship

answer

1. owner makes all of the decisions
2. easy to fulfill the legal requirements
3. rewards and profits go to the sole owner

question

disadvantages of a sole proprietorship

answer

1. resources are limited
2. liable for all the debts and obligations

question

partnership

answer

more than one owner of the business

question

advantages of a partnership

answer

1. owners share responsibility
2. specialization can happen for different aspects of the business
3. greater financial resources
4. easier to borrow money and establish credit

question

disadvantages of a partnership

answer

1. partners have to agree on the management and operation
2. each partner is liable

question

limited partner

answer

responsible only for the money directly invested into the firm and isn't involved in management

question

advantages of a corporation

answer

1. legally separate from the owners
2. easier to raise funds
3. investors receive ownership
4. isn't dissolved if the owner dies

question

investors

answer

receive shares of stock in exchange for the money invested; are voting members of the board of directors; receive dividends

question

dividends

answer

share of profits that investors receive

question

disadvantages of a corporation

answer

1. expensive and complex to organize
2. investors can't make management decisions
3. profits are taxed twice

question

double taxation

answer

corporation pays taxes on the firm's profits and individual investors pay personal income taxes on dividends

question

nonprofit organizations

answer

1. operate and provide goods and services
2. don't make a profit
3. exempt from paying taxes to the government

question

examples of nonprofits

answer

American Cancer Society; American Red Cross; religious groups

question

government

answer

1. provides goods and services
2. uses money from taxes

question

Decisions made by business makers

answer

1. How much to produce?/ How much output to supply?
2. How to produce?
3. How much of each input to demand?

question

explicit costs

answer

resources that a business demands; business owners exchange resources and semi-finished goods in order to finish the final product

question

examples of explicit costs

answer

buildings, raw materials, utilities, insurance, labor, equipment, business license, taxes

question

land

answer

rent

question

labor

answer

wages

question

capital

answer

interest

question

implicit costs

answer

costs of using your own resources without paying corresponding cash for payments

question

examples of implicit costs

answer

time or energy that could be spent on another business

question

3 measures of profit

answer

1. accounting profit
2. economic profit
3. normal profit

question

accounting profit formula

answer

total sales (-) explicit costs

question

accounting profit

answer

useful for accountants who are hired to determine the taxable income of the firm ; does not include implicit costs

question

economic profit formula

answer

total revenue (-) explicit and implicit costs

question

economic profit

answer

type of profit a firm wants; includes implicit costs to compensate for time an energy

question

if economic profit>1

answer

the sales receipts of the firms cover more than the opportunity cost of all the resources used; convinces firms to join an industry

question

if economic profit=0

answer

normal profit

question

normal profit

answer

firms stay in business; all the resources are receiving the same amount they would receive if used in their best alternative uses

question

if economic profit<1

answer

economic loss; firms may edit the industry or decrease production

question

short run

answer

amounts of at least one of the factors of production the firm uses can't be changed

question

variable factors

answer

resources that can be changed in the short run

question

fixed factors

answer

resources that can't be changed in the short run

question

long run

answer

all factors of production being used by the firm can be changed

question

marginal product

answer

the additional output created by the increase of one unit of input

question

increasing marginal returns

answer

when marginal returns increase as inputs increase

question

law of diminishing returns

answer

marginal product will continue to decline as more workers are hired

question

average product

answer

reflects the law of diminishing returns

question

AP product

answer

Total output/ # workers

question

ways MP affects AP

answer

1. MP>AP, +1 input causes AP to increase
2. MP<AP, +1 input causes AP to decrease

question

MP=0

answer

Total product is at its maximum

question

MP= negative

answer

Total product is falling

question

AP=MP

answer

AP is at its maximum

question

level of technology

answer

dictates the marginal and average product function for the firm

question

fixed costs

answer

don't change when output changes

question

examples of fixed costs

answer

lease; rent; payments; insurance; principal and interest on loans; garbage; utility bills

question

FC curve

answer

horizontal line

question

variable cost

answer

change as the level of output changes; increases when output increases

question

examples of VC

answer

number of workers; raw material used in the production process

question

total costs formula

answer

= total fixed costs (+) total variable costs

question

total cost

answer

shows a firm's short-run cost structure

question

answer

=FC+VC

question

variable cost curve

answer

shows the relationship between the firm's VC costs and the level of the firm's output

question

total cost curve

answer

parallel to the VC curve; starts at the FC curve

question

marginal cost

answer

additional cost incurred when the business produces one more product

question

marginal cost formula

answer

change in total cost/ change in quantity; Q always= 1; difference between successive total costs

question

Marginal cost curve

answer

decreases then eventually rises with output due to the law of diminishing marginal returns

question

average fixed costs

answer

FC/(Q or Output)

question

AFC curve

answer

falls as output rises -> "spreading the overhead"

question

average variable cost

answer

VC/(Q or O)

question

AVC curve

answer

similar in shape to VC curve; reflects the law of diminishing returns

question

average total cost

answer

AFC + AVC; TC/Q

question

distance between ATC curve and AVC curve

answer

AFC

question

when MC curve crosses the AVC curve

answer

AVC curve at its minimum

question

relationship between ATC and MC

answer

ATC declines as long as MC is below it; ATC rises as MC is above it

question

relationship between AVC and MC

answer

AVC declines when MC is below it; rises when MC is above it

question

long run cost

answer

all factors are variable and therefor all costs are variable; used to plan for the future

question

long run average total cost curve

answer

drawn with the short run average total cost curve at each level of output; connects the lowest portions of the short-run curves

question

cost envelope

answer

LRATC curve because it "hold" the lowest possible production cost at each level of output in the long run

question

economies and diseconomies of scale

answer

influence resource allocations and output decisions in the long run

question

economies of scale

answer

when a firm's growth leads to lower production costs per unit

question

effect of economies of scale

answer

the larger the economies of sale, the greater the advantage to a large firm

question

disadvantages of economies of scale

answer

smaller businesses may struggle to compete; larger firms that are fewer in number

question

constant returns to scale

answer

when firms tend to see their long-run average cost curve flatten out;

question

diseconomies of scale

answer

when a firm's growth leads to higher production costs per unit; set in when a firm continues to grow

question

why is the LRATC "U" shaped

answer

1. economies of scale-> slopes downward
2. constant returns to scale-> flattens out/ horizontal
3. diseconomies of scale -> slopes upward

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