1. 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 1

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
See Section 6-1 in the main text. 2

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
See Section 6-2 in the main text. 3

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
See Section 6-2 in the main text. 4

5. Snark International balance sheet 31 December 2007
ASSETS
Liabilities
Cash 40
Loans 90
Accounts Receivable 70
Mortgage
150
Stocks
100
Bank Credit 60
Factory Building
330
Total Liabilities
300
Net Worth
240
Total
540

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.
See Section 6-2 in the main text. 6

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
See Sections 6-5 in the main text. 7

8. Maximising profits If MR > MC, an increase in output will increaseQ1 E
MC, MR MC MR
If MR < MC, a decrease
in output will increase
profits.
So profits are maximized
when MR = MC at Q1
See Section 6-3 in the main text, and Figure 6-3.
(as long as the firm
covers variable costs) 8

9. Costs, Revenue and Output
Total Cost
Marginal Cost
Price
Total Revenue
Marjinal Revenue 10 - 1 25 15 21 2 36 11 20 40 19 3 44 8 57 17 4 51 7 18 72 5 59 85 13 6 69 16 96 81 12
105 9

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
See Section 6-3 in the main text. 10