Outlining the Chapter

Transcription

1 Chapter 6 Outlining the Chapter Look over the chapter paying attention to the main topics and concepts. As you look over each section of the chapter, fill in the missing words in the outline below. I. About Business Firms A. Business firms exist whenever people working together can produce more than the combined total of what individuals working alone can produce. B. The structure of firms 1. Someone is when he or she put forth less than the effort agreed to by the group. 2. Choosing someone to be the, or boss, can reduce shirking. 3. The monitor can be kept from shirking by making him or her a claimant of the firm. C. Types of business firms 1. A sole is (a) owned by one individual, (b) who makes all business decisions, (c) receives all the profits or takes all the losses of the firm, and (d) is legally responsible for the debts of the firm. a. Advantages of sole proprietorships 1) Sole proprietorships are easy to form and to dissolve. 2) All decision-making power resides with the sole proprietor. 3) The profit of the firm is taxed only once. Proprietors pay only taxes and do not pay corporate income taxes. b. Disadvantages of sole proprietorships 1) Sole proprietors face liability. 2) Sole proprietors have limited ability to raise funds for business expansion. 3) Sole proprietorships usually end with the death of the proprietor; they have limited life. 2. A is a business that is (a) owned by two or more coowners called partners, (b) who share any profits the business earns, and (c) are legally responsible for any debts incurred by the firm. Study Guide 59 NTC/Contemporary Publishing Group, Inc.

2 a. Advantages of partnerships 1) Benefits of where each can work at the tasks for which he or she is best suited. 2) Profits are only taxed once, under the personal income tax, and not under the corporate income taxes. b. Disadvantages of partnerships 1) Partners have unlimited liability. 2) Decision making in a partnership can be complicated. 3. A is (a) a legal entity that can conduct business in its own name in the same way that an individual does and (b) is owned by its stockholders. a. Stockholders are people who buy of stock. A share of stock gives the purchaser a share of the ownership of the corporation. b. Advantages of corporations 1) Stockholders (owners of the corporation) are not personally liable for the debts of the corporation. They have liability. 2) Corporations continue to exist even if one or more owners of the corporation sell their shares. 3) Corporations are usually able to raise large sums of money by selling stock. c. Disadvantages of corporations 1) Corporations are subject to taxation. 2) Corporations are complicated to set up. d. How to form a corporation 1) (persons that take the first steps to form the corporation) issue a (a document that contains information and facts about the new corporation). 2) The of incorporation must be filled out and submitted to the appropriate officials in the state in which the corporation will be registered. 3) A corporate is granted if state officials approve the articles of incorporation. 4) An meeting of the corporation takes place. e. The corporate structure 1) Financing corporate activity raising money. a) A is a piece of paper on which is written a promise to pay. Study Guide 60 NTC/Contemporary Publishing Group, Inc.

3 i. A value (or par value), a rate, and a date are written on a bond. b) A corporation can also sell to raise money. c) The corporation is under no legal obligation to pay stockholders. purchasers have lent money to the corporation. The corporation must repay these loans, along with extra payments. D. Other business organizations 1. A cooperative, or, is a business that provides services to its members and is not run for profit. 2. A is a contract by which a firm (usually a corporation) lets a person or group use its name and sell its goods or services. In return, the person or group must make certain payments and meet certain requirements. a. The corporation, or parent company, is called the. The person or group that buys the franchise is called the. b. McDonald s, Burger King, Wendy s, Pizza Hut, Domino s Pizza, and Taco Bell are all franchises. II. Costs A. Fixed and variable costs 1. costs (FC), or expenses, are the same no matter how many units of a good are. 2. Variable costs (VC), or expenses, or with the number of units of a good produced. 3. Total costs (TC) = fixed costs variable costs. B. total cost (ATC), or per-unit cost, is total cost divided by the quantity of output. Average total cost (ATC) = total cost quantity of output C. Marginal cost is the of producing an of a good. Marginal cost can be written as: Marginal cost (MC) = change in total cost change in quantity of output Study Guide 61 NTC/Contemporary Publishing Group, Inc.

4 III. Revenues and More A. Total revenue and marginal revenue 1. Total revenue equals the of a good times the sold. 2. Marginal revenue is the revenue from selling an unit of a good. It can be written this way: Marginal revenue (MR) = change in total revenue change in quantity sold B. Deciding how much to produce: comparing with. 1. Firms compare marginal revenue with marginal cost when deciding how much output to produce and sell. 2. A firm wants to produce an additional unit of output as long as marginal revenue is greater than, or equal to, marginal cost. 3. The firm does not want to produce an additional unit of output when marginal cost is than marginal revenue. C. Profit, marginal revenue, and marginal cost 1. Whenever the firm produces and sells an additional unit of a good and marginal revenue is than marginal cost, it is adding more to its total revenue than to its total cost, and therefore it is maximizing. D. How to compute profit and loss. 1. To compute total cost (TC), add fixed cost (FC) to variable cost (VC). 2. To compute total revenue (TR), multiply the price of the good (P) times the quantity of units (Q) of the good sold. 3. To compute profit (or loss), subtract total (TC) from total (TR). E. states that if we add additional units of a resource (such as labor) to another resource (such as capital) that is in fixed supply, eventually the additional output produced (as a result of hiring an additional worker) will decrease. Study Guide 62 NTC/Contemporary Publishing Group, Inc.

5 Chapter 6 Building Vocabulary Match the terms from the list with the descriptions given below. Write the appropriate letter next to the description. a. average total cost b. bond c. corporation d. fixed cost e. franchise f. law of diminishing marginal returns g. limited liability h. marginal cost i. marginal revenue j. partnership k. residual claimant l. shirking m. stock n. unlimited liability o. variable cost 1. The change in total revenue that results from selling an additional unit of output 2. A cost, or expense, that is the same no matter how many units of a good are produced 3. As we add additional units of a resource (such as labor) to a resource (such as capital) that is fixed in supply, eventually the additional output produced (as a result of hiring an additional worker) will decrease. 4. A legal entity that can conduct business in its own name. 5. A claim on the assets of a corporation that gives the purchaser a share of the ownership of the corporation 6. The legal responsibility of a sole proprietor of a business or partners in a business to pay any money owed by the business 7. A business that is owned by two or more co-owners who share any profits the business earns and are legally responsible for any debts incurred by the firm 8. Total cost divided by the quantity of output 9. A condition in which an owner of a business firm can only lose the amount invested (in the firm) by him or her 10. A corporation promises to pay a certain sum of money at maturity and also to pay periodic fixed sums until that date Study Guide 63 NTC/Contemporary Publishing Group, Inc.

6 11. A contract by which a firm (usually a corporation) lets a person or group use its name and sell its goods in exchange for certain payments being made and certain requirements being met 12. Persons who share in the profits of a business firm 13. A cost, or expense, that changes with the number of units of a good produced 14. The behavior of a worker who is putting forth less than the agreed-to effort 15. The additional cost of producing an additional unit of a good. The change in total cost that results from producing an additional unit of output Study Guide 64 NTC/Contemporary Publishing Group, Inc.

7 Chapter 6 AS YOU STUDY Illustrating Economic Skills 1. You are considering opening an ice cream shop in the Fredericksburg, Texas, a picturesque town that attracts many tourists and vacationers. Before you open your new business you must decide which type of firm you would like to start a sole proprietorship, a partnership, or a corporation. In the activity below, list the advantages and disadvantages of each of these three types of businesses for your ice cream shop. Sole Proprietorship Advantages: Disadvantages: Partnership Advantages: Disadvantages: Corporation Advantages: Disadvantages: Study Guide 65 NTC/Contemporary Publishing Group, Inc.

8 Chapter 6 Using Economic Concepts The table below includes the costs and revenues for a small business. Some of the numbers are excluded, but can be determined from the given information. Complete the table using the given information. Quantity Total Total Marginal Marginal Total Produced Price Costs Revenue Revenue Cost Profits What quantity maximizes profits for this firm? 2. Suppose the fixed costs were $10. What would the variable costs be for three units produced? 3. What is the average total cost of producing two units? Study Guide 67 NTC/Contemporary Publishing Group, Inc.

9 Chapter 6 AS YOU REVIEW Practicing for the Test Multiple Choice: Choose the best answer for each of the questions and write the corresponding letter in the space at the left. 1. The legal responsibility of a sole proprietor of a business or partners in a business to pay any money owed by the business is called. a. limited liability b. unlimited liability c. residual claimant d. marginal returns 2. When we add additional units of a resource (such as labor) to another resource (such as capital) that is fixed in supply, eventually the additional output produced will decrease. This best describes. a. a franchise b. limited liability c. the law of diminishing marginal returns d. variable costs 3. Total cost equals cost plus cost. a. marginal, fixed b. average, marginal c. average, fixed d. fixed, variable 4. is the additional cost of producing an additional unit of a good. a. Marginal cost b. Variable cost c. Total cost d. Fixed cost 5. A percentage of the face value of a bond that is paid out regularly (usually quarterly or annually) to the holder of the bond is a. a. par value b. coupon rate c. stock d. return Study Guide 68 NTC/Contemporary Publishing Group, Inc.

10 6. If a firm s total costs are $100 and its variable costs are $75, then what are its fixed costs? a. $25 b. $175 c. $50 d. cannot determine from this information 7. In a corporation, owners have liability. a. limited b. unlimited c. some d. none of the above 8. A corporation can raise money to finance its operations with which of the following? a. bonds b. borrowing c. stocks d. all of the above 9. Suppose a bond has a $50 face value and a coupon rate of 10 percent. What is the dollar amount of each annual coupon payment? a. 50 cents b. 10 dollars c. 10 cents d. 5 dollars 10. Shares of the profits of a corporation distributed to stockholders are called. a. dividends b. stocks c. bonds d. interest Short Answer: 1. One of the disadvantages of a corporation is that it is subject to double taxation. What is double taxation? Study Guide 69 NTC/Contemporary Publishing Group, Inc.