Economics - Unit 3 Flashcards Preview

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Flashcards in Economics - Unit 3 Deck (54)
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Business firm

An organization that uses resources to produce goods and services that are sold to consumers, other firms, or the government.

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Shirking

The behavior of a worker who is putting forth less than the agreed-to effort.

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Sole proprietorship

A business that is owned by one individual who makes all business decisions, receives all the profits or incurs all the losses of the firm, and is legally responsible for the debts of the firm

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Partnership

A business owned by two or more owners, called partners, who share profits and are legally responsible for debts

4

Corporation

A legal entity that can conduct business in its own name in the same way that an individual does.

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Stockholder

A person who owns shares of stock in a corporation

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Asset

Anything of value to which the firm has a legal claim

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Limited liability

A condition in which an owner of a business firm can lose only the amount he or she has invested (in the firm)

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Board of directors

An important decision making body in a corporation. It decides corporate policies and goals, among other things.

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Dividends

Shares of the corporation profits distributed to stockholders

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Bonds

Statement of debt issued by a corporation

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Franchise

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 and requirements.

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Franchiser

The entity that offers a franchise

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Franchisee

The person or group that buys a franchise

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Fixed cost

A coat, or expense, that is the same no matter how many units of a good are produced

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Variable cost

A cost, or expense, that changes with the number of units of a good produced

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Total cost

The sum of fixed costs plus variable costs

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Average total cost

The total cost divided by the quantity of output

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Marginal cost

The cost of producing an addition unit of a good; the change in total cost that results from producing an addition unit of output

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Marginal revenue

The revenue from selling an additional unit of a good; the Change in total revenue that results from selling an additional unit of output

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Law of diminishing marginal returns

A law that states that if additional units of one resource are added to another resource in fixed supply, eventually the additional output will decrease

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Why does a business need a boss?

To efficiently coordinate and direct the activities of others in the organization

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Law of diminishing marginal productivity

If a factor of production is adddd to another factor of production in fixed supply eventually total output will peak and thereafter decrease

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Advantages (2) and disadvantages (2) of sole proprietorships

Advantages:
- all profits belong to one person
- complete control of the enterprise

Disadvantages:
- all responsibility to manage business
- unlimited liability

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Advantages (1) and disadvantages (1) of a franchise

Advantage:
- ready made product/business

Disadvantage:
- profits and decision-making shared with the corporation

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Advantages (1) and disadvantages (1) of a partnership

Advantages:
- specialization possible

Disadvantages:
- potentially difficult decision-making process

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Advantages (3) and disadvantages (1) of a corporation

Advantages:
- limited liability
- perpetual existence
- large capitalization possible

Disadvantages:
- role of "corporate citizenship"

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Examples of corporations (3)

Hewlett-Packard

Intel

Walt-Disney

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The Nader view

Ralph Nader believes that businesses have ethnic and social responsibilities

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the Friedman view

Milton Friedman believes in increasing profits so long as everything he does is within the rules of the game - open and free competition without deception or fraud

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Asymmetric information

Exists when one party has information that another party to a transaction doesn't have

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Where will firms relocate?

Similar firms have an incentive to locate near each other. They do this for the competition of customers.

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General partners

Partners who are responsible for the management of the firm

* unlimited liability

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Limited partner

Restricted to the amount he or she has invested in the firm

* doesn't usually participate in the management of the firm or enter contracts on behalf of the firm

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Perfect competition characteristics (4) and issues (1)

Characteristics:
- has many buyers and sellers
- sells identical products
- no asymmetrical information
- easy entry in and out of the market

Issues:
- sellers are price takers

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Price takers

A seller that can sell all its output at the equilibrium price but can sell none of its output at any other price.

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Examples of perfect competition (3)

*agriculture products (wheat, soybean, coffee, oranges, maple syrup)

Stocks or bonds

Gasoline

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Monopolistic competition characteristics (3) and issues (2)

Characteristics:
- many buyers and sellers
- sells different or unique products
- there are few if any barriers to enter or exit the market

Issues:
- sellers are price makers (price searcher)
- sellers will use advertising to differentiate their products

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Examples of monopolistic competition (5)

Athletic shoes (Nike, Adidas, reebok)

Fast food (McDonald's, Burger King, Wendy's)

Grocery stores (cub, rainbow, piggly wiggly)

Smartphones (Samsung, HTC, Apple, Nokia, etc)

Car producers (GM, Chrysler, Ford...)

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Price maker (price searcher)

A seller that can sell some of its output at various prices

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Oligopoly characteristics (3) and issues (1)

Characteristics:
- has a few sellers
- firms sell either identical or similar products
- many barriers to exit the market

Issues:
- sellers may try to collude; if seller collides, they can act as a cartel

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Collude

Conspire to fix prices

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Cartel

A group with monopoly power

- cartels don't last long because there is too much incentive to cheat

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Examples of an oligopoly? (5)

OPEC (Saudi Arabia, Libya, Venezuela)

Airline industry (American, United, Delta)

Broadcast tv (CBS, NBC, ABC, FOX)

Soda producers (coca cola, Pepsi)

Candy producers (Hershey's, nestled, Mars)

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Monopoly characteristics (3) and issues (2)

Characteristics:
- only has one seller
- has no close substitutes
- many barriers to enter or exit market

Issues:
- price makers (they choose price)
- Sherman antitrust act

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Sherman antitrust act

Outlawed monopolies in the U.S. in 1890

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Government monopoly

Government sanctioned monopolies
- patent
- copyright

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Patent

Format of intellectual property granted to an inventor by government for a stipulated time period

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Copyright

Form of intellectual property granted to an author or artist by government for a stipulated time period

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Natural monopoly

A business that can produce at an unusually low cost

- In many cases, monopolies have exclusive ownership of a resource

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Output =

When MC (marginal cost) = MR (marginal revenue)

* also when profits are maximized!

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Profit (or loss) =

TR (total revenue) - TC (total cost)

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MC =

TC₂-TC₁ = MC

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TR =

MR x Q