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UF / Economics / ECO 2023 / What are the primary forms of business organization?

What are the primary forms of business organization?

What are the primary forms of business organization?


School: University of Florida
Department: Economics
Course: Principles of Microeconomics
Professor: Mark rush
Term: Fall 2016
Tags: ECO2023, Microeconomics, Economics, Microecon, DrRush, Econ, ECO, and midterm2
Cost: 50
Name: ECO2023 Midterm 2 Study Guide
Description: Midterm 2
Uploaded: 02/13/2017
9 Pages 136 Views 4 Unlocks

M.U. Approach to Consumer Demand

What are the major forms of business organization?

Law of Demand: Price↑Quantity Demanded ↓

 Price↓Qd ↑

Basic assumption of human behavior: to make yourself as well off as possible


- Cardinal utility: assumes we can measure a person’s utility  - Ordinal utility: assumes a person can tell us whether a change makes  him/her better off, worse off, or no change.  

Q↑=> MU↓

MU: Marginal Utility: Change in total utility brought about by changing  consumption



Prices & income = limit consumption

MU Don't forget about the age old question of What is the significance of the Brock Turner case in studying human sexuality in the news?

ΔQP=¿ how much utility are youbuying for eachdollar you spend

What is the monopoly profit maximization?

*if you can ↑TU, then you are not at your max*

Law of Demand 

- people ax utility  

- measure utility

- as the quantity increase, the marginal utility decreases  

Risk and Insurance 

- use the cardinal utility approach to study decisions under risk;  especially the decision to buy insurance  

Expected Wealth and Utility 

- consumers maximize expected utility


Accident (50%)

NO accident (50%)

W = 1,000

W = 5,000

U = 150

U = 350

Price is determined by, what?

Don't forget about the age old question of What is another reasonable explanation for an increase in autism rates?

No Insurance  

E(U) = 150 x 0.5 = 350 x 0.5 = 250

E(W) = 1000 x 0.5 = 5000 x 0.5 = 3,000

risk lowers utility

Insurance : Demand  

- will one buy this insurance policy?  

Premium w insurance: 2,000

Without insurance: Pay 4,000 with accident, pay 0 without accident

Insurance ($2,000)  

Accident (50%)  

W = 1,000 + 4,000 – 2,000 = 3,000

 Car insurance premium  

Utility: 300

NO accident (50%)  

W = 5,000 + 0 – 2,000 = 3,000

Utility: 300

E(U) = 300 x .5 + 300 x .5 = expected utility of 300 with insurance  E(U) = 200 without insurance  

- more utility with insurance than without, so YES buy the insurance

*if utility with AND without insure are equal, MAYBE buy the insurance* *If expected costs = expected profit the suppliers MAYBE sell the insurance*  

E(profit) = revenue - cost

if the risk of an accident ↑, the expected cost per person ↑, and the  premium ↑

- private info

info possessed by one party to a transaction that is too costly for the  other party to aquire = ADVERSE SELECTION

- screening and signaling  

companies want to screen consumers into the appropriate risk group low risk consumers want to signal their risk group We also discuss several other topics like English reformation is a series of what?

Ordinal Utility 

Indifference curves  

- assume the person consumes 2 goods

- all points on the curve have the same total utility

: the consumer is indifferent among any combination of goods on an  indifference curve

Indifference Curves: MRS 

Marginal Rate of Substitution (MRS)  

- the magnitude of the slope of an indifference curve  

Decreasing Marginal Rate of Substitution  

- the MRS decreases moving downward along an indifference curve  

Budget constraint / equation  

*Pb x Qb = Pw x Qw = INC (income)  

A person is indifferent moving along an indifference curve, but not  indifferent moving between indifference curves (higher curves have  higher TU)

Changes in the Budget Line 

change in the price rotates the budget line  

- ↓P rotates inward

- ↑P rotates outward

change in income shifts the budget line

- rise in income shifts the budget line outward, but doesn’t change the  slope

- fall in income shifts the budget lien inward, but doesn’t change the  slope Don't forget about the age old question of Who discovered the surface structures of the moon?

Derive a Demand Curve 

- we use the indifference curve/budget line diagram to determine how a  change in price affects the Qd

- we can derive a demand curve with 3 basic assumptions  1. people maximize their utility

2. people can tell if a change makes them better off, worse off, or  leaves them the same

3. the marginal rate of substitution decreases moving downward along the indifference curve

Introduction to Business Firms – Chapter 10  

3 major forms of business organization:

1) proprietorship

- single loan

- single owner

- advantage: easy to organize, profits are taxed once

- disadvantage: firm dies with owner, unlimited liability

2) Partnership

- Two or more partners  

- Advantages: profits are taxed once

- Disadvantage: unlimited liability

3) Corporation  

- One or more shareholder

- Advantages: limited liability

- Disadvantages: profit taxed twice

With millions of “owners” how are corporations run?  

Shareholders  board of directors  managers  

Stock market 

- Average return = aprox. 8%

- Capitol gain/loss Don't forget about the age old question of Is ichnology the study of?

- EPS – earnings per share  

- Dividend and yield(DIV/price x 100)  

- PE ratio (price earnings) (price/earnings)  

- Maret capitalization (# of shares) x (price per share)

Production Cost – Chapter 11 

Production function:

- All firms turn inputs into outputs

 Production function  

 Q = F (L,K)

Output 2 inputs

Short Run: a period of time over which at least one input is fixed Long Run: a period of time long enough so that all inputs can be varied

Short Run

Long Run

Labor (L)







MLP = marginal product of labor  

MLP = ( Δ Q¿ /(Δ L)

Total costs = fixed cost + variable cost

TC = FC + VC

Diminishing MLP: as employment ↑, eventually MLP↓ We also discuss several other topics like What happens when the market is not in equilibrium?

- Increased specialization  

- More labor working with same amount of capitol  

Average fixed costs / variable costs / totally costs

AFC = FC / Q

AVC = VC / Q

ATC = TC / Q

MC = (ΔTC)/(ΔQ)

Marginal and Average Relationship  

If the marginal ________ is greater than the average ________ then the  average _______ rises

If the marginal ________ is less than the average ___________ than the average _______ falls

ATC (average total cost) = AFC (avg. fixed cost) + AVC (avg. variable cost)   - average wage, interest, rent, normal profit

Total cost:

- Labor  

- Capitol  

- Land  

- Entrepreneur


- Wage

- Interest

- Rent  

- Profit (avg. profit = normal  profit)

The ATC and AVC curves are U-SHAPED and become vertically closer as Q↑ The MC curve goes through the ATC and AVC curves at their minimum points

Perfectly Competitive Firms 

Perfect competition:

- Lots of firms and buyers

- Each firm produces an identical product

- No barriers to entry

- Legal barriers (copyrights, patents)

- Cost based barriers (natural monopoly)

Price is determined by the market

MR = MC => all profitable units produced

Past MR = MC => cost exceeds marginal revenue  

- ECONOMIC PROFIT: above average profit P > ATC

- NORMAL PROFIT: average profit P = ACT

- ECONOMIC LOSS: making less than the normal profit P < ATC

A firm does not close when it has economic loss (because of fixed costs)  - Short run: loss is less if the firm stays open

- Long run: (no fixed costs) better off closing

Tot rev > var cost => open  

Tot rev < var cost => close

*A firms supply curve is it’s marginal cost curve above the minimum  average variable cost*

- start: P = ATC (normal profit)

- short run: P > ATC (economic profit)  

- & entry of new producers

- Long run: P = ATC (normal profit)

Monopolies – Chapter 8 


- Market with one firm

- Produces a product with no close substitutes

- Insurmountable barriers to entry

The market demand curve is the same as the firm’s demand curve

Monopoly profit Maximization:

P* = the highest price a firm can charge and sell product

Profit = P x Q – ATC x Q

The “rule” for perfectly competitive firms and monopolies:  - P > ATC => ECONOMIC PROFIT



Monopoly vs. Competition: (firm to firm) 

Short Run

Long Run



- Eco profit

- Normal  


- Eco loss


------- X

- Normal  



- Eco profit

- Normal  


- Eco loss

barrier to  



- Eco profit

- Normal  


Natural Monopoly 

When one firm can supply the entire market at a lower total cost than could  two or more firms.

Price discrimination:

1) Firm charges customer different prices for different unit of the product - Respects fact that peoples demand curves are downward sloping 2) Firm charges different people different prices for the same product - Must be 2+ groups of consumers with different willingness’s to pay  - Firm must be able to identify which group a customer falls - Firm must be able to prevent resales pf the product amongst  customers

- Low demand vs. high demand consumers


What creates a natural monopoly?

- Large fixed cost

- Small marginal cost, which means a small variable cost What sort of firms?

- General utility

- Electric  

- Natural gas

- Telephone

- Etc

Societal problems:  

- One firm = lower total cost

- One firm = monopoly

Potential solutions: regulation

Natural Monopoly Regulation  

2 old methods of regulation

1) AVG cost pricing rule

- P = ATC

- Q = Qd

- Advantage: normal profit

- Disadvantage: Dead Weight Loss

2) Marginal cost pricing rule

- P = ATC

- Q = Qd

- Advantage: No DWL, efficient

- Disadvantage: Economic Loss

Problem with Regulation:

- Capture theory: The firm “captures” the regulators so that the  regulators advance the firms interest not societies interest - Inflate costs

Possible Solutions:  

Incentive regulation:

- Regulator sets a price cap that may be charged

- The firm is allowed to keep part of any economic profit it can earn






Min. Competition

-lots of firms

-no barriers to  entry


-lots of firms

-no barriers to  entry


-few firms

-large barriers to  entry

-1 firm

-insurmountable  barriers to entry -unique product



Monopolistic Competition 


- Many firms  

- Each firm produces a differentiated product

- No barriers to entry

Capacity: where the ATC is at its minimum

Higher cost come w variety



- Market with few firms  

- Large entry barriers

Duopoly: market with 2 firms

Mutual Independence:

- Each firms profit depends on its decisions and the decisions of the  competitors

- Firms managers know that its competitor will respond to its action, and they will respond in return, etc.  


- John Von Neumann

- John Nash

Elements of a game:

1) Rules  

2) Strategies  

3) Payoffs

NASH Equilibrium:

Each player uses his or her best strategy taking as given the  competitors strategy  

Dominant Strategy: Cheat or comply – whichever method you would choose  in all situations  

Repeated Game Strategy: 

- tit-for-tat: ill do this time what you did last time

- increase the likelihood of getting to cooperative equilibrium


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