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Chapter 6 Introducing supply decisions

Chapter 6 Introducing supply decisions. David Begg, Stanley Fischer and Rudiger Dornbusch, Economics , 9th Edition, McGraw-Hill, 2008 PowerPoint presentation by Alex Tackie and Damian Ward. Forms of business organisation. Sole trader

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Chapter 6 Introducing supply decisions

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  1. Chapter 6Introducing supply decisions David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 9th Edition, McGraw-Hill, 2008 PowerPoint presentation by Alex Tackie and Damian Ward

  2. Forms of business organisation Sole trader owned by an individual; entitled to income and responsible for losses Partnership jointly owned by two or more people unlimited liability Company ownership divided among shareholders legal entitlement to produce and trade limited liability shares of public companies resold on the stock exchange

  3. Some key terms Revenues the amount a firm earns by selling goods and services in a given period Costs the expenses incurred in producing goods and services during the period Profits the excess of revenues over costs

  4. A firm’s balance sheet Assets what the firm owns Liabilities what the firm owes Balance sheet lists a firm’s assets and liabilities at a point in time

  5. Snark International balance sheet31 December 2007

  6. Costs and the economist Accounting cost actual payments made by a firm in a period Opportunity cost amount lost by not using a resource in its best alternative use Economists include opportunity cost in a firm’s total costs Economic profit is more than the accountant’s profit because of the opportunity cost.

  7. The production decision For any output level, the firm attempts to minimize costs Assume the firm aims to maximize profits Profits depend on both COSTS and REVENUE each of which varies with the level of output Marginal cost (MC) is the rise in total cost if output increases by 1 unit Marginal revenue (MR) is the rise in total revenue if output increases by 1 unit

  8. Maximising profits MC, MR MC E MR 0 Q1 Output If MR > MC, an increase in output will increase profits. If MR < MC, a decrease in output will increase profits. So profits are maximized when MR = MC at Q1 (as long as the firm covers variable costs)

  9. Costs, Revenue and Output

  10. Will firms try to maximise profits? Large firms are not run by their owners there is separation of ownership and control Managers may pursue different objectives e.g. size, growth But firms not maximising profits may be vulnerable to takeover or managers may be given share options to influence their incentive to maximise profits

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