Textbook Notes (358,902)
Canada (155,911)
Economics (375)
ECO100Y5 (280)
Michael H O (131)
Chapter 7

ECO100Y5Y Chapter 7 Notes.docx
ECO100Y5Y Chapter 7 Notes.docx

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University of Toronto Mississauga
Michael H O

Chapter 7 Notes - Single Proprietorship; has one owner who is personally responsible for firms actions and debts - Ordinary Partnership; at least two joint owners, each is personally responsible for actions and debts - Limited Partnership; has two classes of owners o General partners; take part in managing firm and personally liable for actions and debts o Limited partners; no part in management of firm and risk only money they have invested - Corporation; has legal existence separate of that of owners o Private; not traded on stock exchange o Public; traded on stock exchange - State-owned Enterprise; owned by government o Called Crown corporations - Non-Profit; provide goods/services with objective of covering costs, aka NGO - Multi-national enterprise (MNE); firms that have operations in more than one country Financing of Firms - Money raised for carrying on business called financial capital - Real capital; physical assets; factories, machinery, offices Types of Financial Capital - Equity; funds provided by owners of firm o Corporations ask for funds in return for stocks, shares, or equities o Profits paid to shareholders called dividends - Debt; funds borrowed from creditors (individual or institutional) outside the firm o Creditors are not owners o Commercial banks, financial institutions o Bonds; debt instrument carrying a specified amount, a schedule of interest payments, and usually a date for redemption of its face value o Two characteristics of all loans  Carry an obligation to repay amount borrowed (principal amount)  Carry an obligation to make some form of payment to lender called interest o When principal amount is repaid, it is called redemption date of the debt o Amount of time between issue of debt and redemption date is called term Goals of Firms - Theory of firm o All firms assumed to be profit-maximizers o Each firm is assumed to be single, consistent decision-making unit o Two assumptions allow theory to ignore firm’s internal organization and financial structure o Using assumptions, economists can predict behavior of firm Production - Four major inputs o Inputs that are outputs from some other firm, ex. spark plugs, electricity, steel  Intermediate Products; all outputs that are used as inputs by other producers in further stage of production  Output for one firm but input for another o Inputs from nature; land owned or rented by firm o Inputs that are services from workers and managers employed by firm o Inputs that are services of physical capital; facilities, machinery and equipment used by firm - Production Function; functional relation showing maximum output that can be produced by any given combination of inputs - Specifies maximum amount of output that can be obtained from given amount of input o Written as Q = f (L,K)  Q = flow of output  K = flow of capital services  L = flow of labour services  f = production function Costs and Profits - Find out profits be taking revenues from selling output and subtracting all costs from inputs - Economic vs. Accounting Profits o Accountants subtract all explicit (costs that actually involve purchase of goods/services; hiring, equipment) costs from revenues o Accounting Profit = Revenue – Explicit Costs o Economists subtract explicit costs, also subtract implicit costs (opportunity cost of owners time, opportunity cost of owners capital)  When this is subtracted from firm’s revenue, results in Economic Profit o Economic Profit; difference between revenues received from sale of output and opportunity cost of inputs used to make output. Negative economic profits are called economic losses o Also called Pure Profit o Economic Profit = Revenues – (Explicit Costs + Implicit Costs) o Economic Profit = Accounting Profit – Implicit Costs Opportunity Cost of Time - Implicit cost of next best alternative job - Ex. Entrepreneur opens restaurant and gets $1000/month instead of working for someone else and getting $4000/month; implicit cost = $3000/month Opportunity Cost of Financial Capital - What could be earned by lending this amount to someone else in a riskless loan o Owners could have purchased gover
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