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7 Section 1 About Business Firms © EMC Publishing, LLC

Why Do Business Firms Exist? A business firm is an organization that uses resources to produce goods and services sold to consumers, other firms, or the government. © EMC Publishing, LLC

Why Are Bosses Necessary? Business firms need bosses and employees: Bosses: organize factors of production to ensure a profit Workers: convert raw material to usable goods and services – Marx ‘the source of all value is labor’ © EMC Publishing, LLC

Exhibit 7-2 from the Student Text Consider adding your own or students’ examples to the chart. © EMC Publishing, LLC

The Franchise A franchise is a contract that lets a person or a group use a firm’s name and sell the firm’s goods in exchange for certain payments and requirements. A famous example is the franchises of the McDonald’s Corporation. The entity that offers the franchise is the franchiser. McDonald’s Corporation is the franchiser. Person or group buying franchise is the franchisee © EMC Publishing, LLC

What Ethical and Social Responsibilities Do Businesses Have? Ralph Nader thinks that businesses have ethical and social responsibilities. He also believes that businesses should treat their employees well and donate funds to meet social needs in the community. Milton Friedman believes that a business has only one social responsibility: to use its resources and increase its profits without deception or fraud. He believes that a business should earn as much as possible by selling the public something it wants to buy. Any other use of resources is outside the business’s social responsibility. © EMC Publishing, LLC

Where Will Firms Locate? Similar firms have an incentive to locate near each other as they compete for customers. Gas stations © EMC Publishing, LLC

7 Section 2 Costs © EMC Publishing, LLC

Fixed and Variable Costs Fixed and variable costs are associated with the production of goods. A fixed cost is a cost, or expense, that is the same no matter how many units of a good are produced. An example is the rent paid for a building. A variable cost changes with the number of units of a good produced. Total cost is the sum of fixed cost plus variable cost: Total cost = Fixed cost + Variable cost. © EMC Publishing, LLC

Exhibit 7-5 from the Student Text Here are five costs concepts: fixed cost, variable cost, total cost, average total cost, and marginal cost. © EMC Publishing, LLC

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Revenue and Its Applications 7 Section 3 Revenue and Its Applications © EMC Publishing, LLC

Total Revenue and Marginal Revenue Marginal revenue (MR) is defined as the revenue from selling an additional unit of a good—that is, the change in total revenue that results from selling an additional unit of output. © EMC Publishing, LLC

Firms Have to Answer Questions How much should we produce? What price should we charge? © EMC Publishing, LLC

How Much Will a Firm Produce? A firm should continue to produce as long as marginal revenue is greater than marginal cost. In fact, economists state that if a firm seeks to maximize profits or minimize losses, it should produce the quantity of output at which MR = MC. © EMC Publishing, LLC

What Every Firm Wants: To Maximize Profit Maximizing profit is the same as getting the largest possible difference between total revenue and total cost. © EMC Publishing, LLC

How to Compute Profit and Loss When a firm computes its profit or loss, it first determines the total cost and total revenue and then finds the difference. Total cost = Fixed cost + Variable cost. Total revenue = Price x Quantity of good sold. Profit (or loss) = Total revenue - Total cost. © EMC Publishing, LLC

How Many Workers Should the Firm Hire? The law of diminishing returns states that if additional units of one resource are added to another resource in fixed supply, eventually the additional output will decrease. © EMC Publishing, LLC

Exhibit 7-6 from the Student Text The law of diminishing returns states that if additional units of one resource are added to another resource in fixed supply, eventually the additional output will decrease. © EMC Publishing, LLC