Mirco Economics Chapter 7

Sole proprietorship

Basically, self-employment. Owning a small business. One owner supervises business operations

Partnership

Has more than one owner. The owner shares the management of the business. It is easier to raise money. Each owner has unlimited liability.

Corporation

The main type of business organization. Has rights as a legal entity similar to a person. Can raise large amounts of money- by issuing stock. The owner's liability is limited to whatever amount they invested in the firm.

Shirking

Not doing your job

Formula of Profit

Profit = Total Revenue – Total Cost 

Explicit costs

Actual, monetary costs. Wages, electricity, etc. 

Implicit costs (AKA opportunity costs of production)

Foregone income from going into business (any income you are no longer making because you went into business, typically, this refers to your old salary)

Inputs

Anything that goes into the production process

Fixed input

An input whose quantity/ amount does not vary with the level of output. Ex. Rent, insurance 

Variable inputs

Everything else, inputs that vary with the level of output

Marginal physical product (of labor)

The change in output from adding one additional unit of variable input (labor)

Law of Diminishing Marginal Returns

As you increase your variable input, the map rises first and then eventually declines 

Fixed costs

Costs that do not vary with the level of output. Costs associated with fixed inputs. Ex. Rent, insurance

Variable costs

Costs that vary with the level of output. Costs associated with variable inputs.  

Total Costs Formula

Total Costs (TC) = Total Variable Costs (TVC) + Total Fixed Costs (TFC) 

Marginal Costs (MC)

The change in total cost that results from change in output

Marginal Costs Formula

Change in Total Cost/ Change in Output