ECON 103 Chapter Notes - Chapter 7: Retained Earnings, Risk Premium, Fixed Cost
31 May 2018
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Wednesday, March 7, 2018
Economics Chapter 7 Review
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-7.1 Organization of Firms
-Single Proprietorship: Has one owner/manager who is personally responsible for
the firms actions and debts. He is responsible for all aspects of the business by
himself.
-Ordinary Partnership: A firm that has two or more joint owners, each of whom is
personally responsible for the firms actions and debts.
-The limited partnership: This is less common then a ordinary partnership. This firm
has two classes of owners: general partners, who take part in managing the firm and
are personally liable for the firms actions and debts, and limited partners, who take no
part in the management of the firm and risk only the money they have invested.
-Corporation: A firm that has a legal existence separate from that of the owners. A
corporation is a firm regarded in law as having an identity of its own; its owners are
not personally responsible for anything that is done in the name of the firm, though its
directors may be.
-State Owned Enterprise: A state owned enterprise is owned by the government but
is usually under the direction of a more or less independent, state appointed board.
Although its ownership differs, the organization and legal status of a state owned
enterprise are similar to those of a corporation. In Canada state owned enterprises
are called Crown Corporations.
-Non-profit Organization: Are established with the explicit objective of providing
goods or services to customers but having any profits that are generated remain with
the organization and are not claimed by the individuals within the organization. In
many cases, some goods or services are sold to consumers while others are
provided free or charge. Non-profit firms therefore can earn their revenue from a
combination of sales and donations. Firms that provide goods and services with the
objective of just covering their costs. These are often called NGOs.
-Multinational Enterprise (MNEs): Firms that have operations in more than one
country.
-Having locations in several countries is very rare for single proprietorships and
ordinary partnerships. But having locations in several countries if common for limited
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Wednesday, March 7, 2018
partnerships (such as large accounting and law firms) and even more common for
corporations.
-Finally, note that not all production in the economy takes place within firms. Many
government agencies provide goods and services, such as defence, roads, school,
and health care services. In most of these cases goods and services are provided to
the citizens without directly charging for their use; costs are financed through the
governments general tax return.
-The money a firm raises for carrying on its business is referred to as the firms
financial capital.
-The basic types of financial capital used by firms are equity and debt. Equity are
funds provided by the owners of the firm. Debt are funds borrowed from creditors
(individuals or institutions) outside the firm.
-In individual proprietorships and partnerships, one or more owners provide much of
the required funds. A corporation acquires funds from its owners in return for stocks,
shares, or equities. These are basically ownership certificates. The money goes to the
company and the shareholders become owners of the firm, risking the loss of their
money and gaining the right to share in the firms profits. Profits that are paid out to
shareholders are called dividends. One easy way for an established firm to raise
money is to retain current profits rather than paying them out to shareholders.
Financing investment from such retained earnings add to the value of the firm and
hence raises the market value of existing shares.
-Dividends: Profits paid out to shareholders of a corporation.
-Bond: A debt instrument carrying a specified amount, a schedule of interest
payments, and usually a date for redemption on its face value.
-The firm’s creditors are not owners; they have lent money in return for some form of
loan agreement, or IOU. Firms often borrow from commercial banks or other financial
insinuations, who channel money from their depositors to borrowers. Firms can also
choose to borrow money directly from non bank lenders, with whom there are many
possible types of loan agreements, which are called debt instruments or bonds.
-Two characteristics are common to all loan agreements. First, they carry an obligation
to repay the amount borrowed, this is called the principal of loan. Second they carry
an obligation to make some form of payment to the lender called interest. The time at
which the principal is to be repaid is called the redemption date of the debt. The
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amount of time between the issue of the debt and its redemption date is called its
term.
-Economists generally make two key assumptions about firm behaviour. First firms are
assumed to be profit maximizers, seeking to make as much profit for their owners as
possible. Second, each firm is assumed to be a single consistent decision making
unit.
-These two key assumptions about firms allow economists to ignore the details related
to how firms are organized and focus on deriving straight forward predictions about
their market behaviour- predictions that can be subjected to empirical study.
-7.2
-Among the many inputs entering into car production, for example, are steel, rubber,
spark plugs, electricity, the site of the factory, machinists,accountants, spray painting
machines, forklift trucks, lawyers, and manager. These inputs can be grouped into
four broad categories.
•inputs that are outputs from some other firm, such as spark plugs, electricity, and steel
and rubber. Intermediate products
•inputs that are provided directly by nature, such as the land owned or rented by the
firm.
•inputs that are the services of labour, provided by the workers and mangers employed
by the firm.
•inputs that are the services of physical capital, such as facilities and machines used
but the firm.
-Intermediate products: All outputs that are used as inputs by other producers in a
further stage of production,
-The items that make up the first group of inputs are called intermediate products
because they are the output of one firm but the input for another. If these intermediate
products are traced back to their sources, all production can be accounted for by the
services of the other three kinds of inputs, which are called factors of production.
These are gifts of nature such as soil and raw materials, called land; physical and
mental efforts provided by the people called labour, and factories and machines and
the human made aids to be production called capital.
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Document Summary
Single proprietorship: has one owner/manager who is personally responsible for the rms actions and debts. He is responsible for all aspects of the business by himself. Ordinary partnership: a rm that has two or more joint owners, each of whom is personally responsible for the rms actions and debts. The limited partnership: this is less common then a ordinary partnership. Corporation: a rm that has a legal existence separate from that of the owners. A corporation is a rm regarded in law as having an identity of its own; its owners are not personally responsible for anything that is done in the name of the rm, though its directors may be. State owned enterprise: a state owned enterprise is owned by the government but is usually under the direction of a more or less independent, state appointed board. Although its ownership differs, the organization and legal status of a state owned enterprise are similar to those of a corporation.
