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Economics 202 Ch 19
Principles of Economics Ch 19
| Question | Answer |
|---|---|
| Firm | An ability that employs resources to produce goods and services. |
| Most resources (labor, land, capital, entrepreneurship): | Are owned by households. |
| Firms are often the best way to: | Organize the limited resources for production. For many types of production, firms can produce more efficiently (at lower cost) than households. |
| The efficiency advantage that firms have over household production may occur because: | Firms can reduce transaction costs. |
| Transaction Costs | The costs of bringing buyers and sellers together for exchanges. |
| Productivity | Is measured by output per unit of input. |
| Team production allows for two advantages over individual production, they are: | Specialization of labor and extensive use of capital. |
| Specialization of Labor | Each worker may become very skilled and productive at his or her specific task. |
| Extensive use of Capital | A large assembly plant may include hundreds of millions of dollars worth of capital, making the team of workers employed at the plant highly productive. |
| Shirking | Avoiding the performance of an obligation. |
| An Agent | A person who agrees to act for the benefit of another, the principle. |
| The Principle-Agent Problem | The problem of shirking by employees. |
| Firms are either: | Business firms or nonprofit firms. |
| Business firms are owned by: | Individuals, partners, proprietors, or stockholders. |
| The most common legal type of business firm is: | The proprietorship, but in terms of total sales, corporations are the most important type of business firm. |
| In a competitive market, the goal of profit-maximization will compel a business firm to do two things that serve the best interest of society: | The firm will use its resources to produce in response to consumer demand and the firm will use its resources as efficiently as possible. |
| Proprietorship | A firm owned and operated by one individual. |
| The advantages of a proprietorship are: | To dissolve a proprietorship, the proprietor fulfills any remaining obligations of the firm and then stops conducting business. The owner controls the business and can make decisions in pursuit of self-interest without the need to consult others. |
| The disadvantages of proprietorship are: | The proprietor has unlimited liability, which means the proprietor is personally liable for the debts of the proprietorship. Difficulty in raising large amounts of financial capital. Proprietorships end with the death of the proprietor. |
| Partnership | A firm owned and operated by two or more co-owners. |
| Advantages of partnerships:: | The possibility of specialization where each partner can specialize in his or her area of expertise. The possibility of more financial capital than a proprietorship. Easy to form. |
| In a partnership the partners need to enter into a partnership agreement in writing detailing: | Each partner's contributions to the partnership, responsibilities, and share of profits and losses. |
| The major disadvantage of a partnership is: | The partners have unlimited liability. A partner is liable for all debts incurred by the partnership, including debts arising from the action of the other partners. |
| Corporation | An organization owned by stockholders that is considered a legal person, separate from its owners. |
| To "incorporate" | "To give a body to" |
| Advantages of a corporation: | The stockholders (owners) have limited liability. Relative ease in raising large amounts of financial capital. Corporations do not end with the death of a stockholder. |
| Disadvantages of a corporation: | Corporations are relatively complex and expensive to organize, to operate, and to dissolve. Corporations are subject to double taxation. Corporations are subject to problems caused by separation of ownership and control. |
| Proprietorships and partnerships rely mainly to two types of financing: | Self-financing and borrowing from financial institutions. |
| Besides self-financing and borrowing from financial institutions, corporations can also get additional financial capital by: | Issuing additional shares of stock and selling bonds. |
| Net Worth | The firm's assets minus its liabilities. |
| The balance sheet of a business firm shows: | The assets, liabilities, and net worth of the firm. |
| Nonprofit Firms include: | Government agencies, schools, churches, and charitable organizations. |
| If a nonprofit firm has excess funds at the end of its budget year: | Those funds carry over to the budget for the next year. |
| The absence of residual claimants in nonprofit firms is likely to lead to: | Employees engaging in more shirking in nonprofit than in profit-seeking firms. Top administrators spending any excess funds within the firm to benefit themselves. |
| No Residual Claimants | There are no owners. |
| Nonprofit firms can be classified as either: | Private or public. |
| A private nonprofit firm is: | Financed by the voluntary actions of private individuals (customers and contributors) and is very responsive to their desires. |
| A public nonprofit firm is: | Financed by involuntary contributions (taxes) and does not have to be as responsive to the desires of taxpayers. |
| In his book "The Wealth of Nations, Book 1", Adam Smith asserts that the division of labor increases labor productivity for three reasons: | Increase of dexterity in every particular workman, saving of the time which is lost in passing from one species of work to another, invention of a great number of machines which facilitate and abridge labor and enable one man to do the work of many. |
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