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Business Structures.docx

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ECON 101
Emanuel Carvalho

Utility Theory. October 19, 2012 Utility is an expression or measure of consumer’s preferences. Measured in UTILS. Alone, the number of utils assigned to a commodity by a consumer is meaningless. What is meaningful is how the number of utils assigned by the consumer to a unit of a commodity compares to the number of utils assigned to other units of the same commodity or units of other commodities. Total utility: (TU) The total utility attributed to the consumption of various units of a particular commodity. Marginal utility: (MU) The addition to total utility attributed to the consumption of each additional unit of the commodity. As we get more units of a commodity, the MU decreases (as in example)  DMU: Diminishing marginal utility: During a specified period of time, a consumer added utility (MU) diminishes with the consumption of each additional unit of the output. This is the norm, no matter what product. (Bar of gold ex.) Possible exceptions: (Ex. being a set collector – paintings etc.) Relationship between marginal utility and total utility: The total utility attributed to a certain commodity is give by the summation of marginal utilities from the consumption of each additional unit of the commodity. The total utility curve initially increases at a decreasing rate – because of DMU. Gets to point and after that starts decreasing (after 1520 – in example) The marginal utility curve is negatively sloped – because as quantity increase, the Marginal utility decreases. Because we assume consumers are rational we don’t expect them to cross the horizontal line (to negative) or even to zero. Maximum utility: at what point does a household maximize their utility? Background: A consumers purchases are constrained by 2 factors: 1. The size of money income 2. Commodity prices Given the two constraints, a household will not be maximizing their utility unless; the MU per dollar spent is equal across all categories of goods purchased. MU over price of the commodity. Business Structures October 24, 2012 1. Proprietorship = a single owner, solely responsible for operating the business entity. Advantages of being an owner: - Only person making decisions - All profit is yours Disadvantage of being an owner: - There are no other perspectives - Unlimited liability (fully liable for all debts incurred by the business) - Size of business is limited by the amount of money that a single owner can raise 2. Partnership = Two or more owners, that together manage the operations of the entity. Advantages of being an owner: - Sharing of ideas; more perspective - More access to money capital, positively affect the size of the business Disadvantage of being an owner: - Split profits - Conflicts develop between partners - Each owner is liable for all debts incurred by the business Limited partnership in the business: Only brought in to infuse money into the business, not subject to unlimited liability. They make no decisions etc. They are liable solely for all the money they invested, nothing else. 3. Corporations = is owned by shareholders. They elect a board of directors. The board is in charge to hire the management. And to operate the business to operate the business according to a set of defined guidelines. As owners, shareholders are entitled to a share of the profit, known as dividends. Retained earnings/undistributed corporate profits = not given to shareholders, but the money is re-invested into the company. Shareholders don’t mind because they expect that will mean bigger dividends in the future. Advantages of being a shareholder: - Limited dividends Disadvantage of being a shareholder: - No say in decisions - Shared profits big time - Double taxation: you pay corporate taxes, before dividends are paid out AND then again after you pay income tax. Production Assessing production efficiency: 1. Technological Efficiency: Points to methods of production that employ the fewest inputs that result in the desired outputs. Therefore using the least amount of factors of production. (Engineers) 2. Economic Efficiency: Methods of production that incur the lowest cost in producing desired levels of output. Such that the economically most efficient process is the one that is of least cost. (Economists) *A technologically efficient method of production can never be the economically most efficient method. * Output: Inputs: Factors of Production services production,land process: obtained by labor, capital method of combining factors of and production production entrepenurship Costs; Social and Private Costs Social costs: based on alternative cost principle: (opportunity) Cost of producing a commodity is measured on a basis of the market value of other goods and services that the inputs employed in the production of the particular commodity could have produced instead. Private costs: The costs incurred by firms in producing desired levels of output. (Focus on this one) Are subdivided into Implicit and explicit costs. Implicit = the costs associated with the employment of an owners resources including both time and money capital. (K & L) measured in terms of the return the resources could obtain the market, if employed in the next best alternative. Explicit = Normally considered by accountants (payroll etc.) Time horizons Short run: A period in which the quantities of some factors of production cannot be readily changed. The quantities of some factors are fixed. Examples: Land, management, capital (machinery too), buildings, technology) in the short run the quantity of one factor is constant or at least fixed. (Usually more than one) Long run: a period in which all factors of production CAN be changed. In other words they are variable. Examples: Land, labor, capital, entrepreneurship as well as technology. Production in the short run: Va
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