1. 1 ECONOMICS 200 PRINCIPLES OF MICROECONOMICS Professor Lucia F. Dunn Department of Economics

2. 2 The Firm (1) Single Proprietorship Proprietorship:  Proprietor has unlimited liability. (2) Partnership  Each partner has unlimited liability.  “Limited Partners” in a limited partnership do not have unlimited liability, but they also have no say in running the firm. Three Major Forms of Firm Organization (3) Corporation  Limited liability.  Corporation can be sued as legal entity.  Disadvantage: Corporate Profits Tax

3. 3 The Firm  Economists consider costs in the opportunity cost sense.  This can give me a different number from what an accountant would come up with for cost. How Do Firms Figure Their Costs?  There are distinctions to be made: (1) Economic Cost vs. Accounting Cost (2) Economic Profit vs. Accounting Profit

4. 4 The Firm 1. Explicit Cost  Actually Occur : i.e. Money changes hands. 2. Implicit Cost  No money changes hands. (1) Opportunity Cost of Owner’s Own Funds. (2) Opportunity Cost of Owner’s Time (3) Depreciation: covers the using up or wearing out of an asset over time. Imputed (or Implicit) Costs vs. Explicit Costs  Accountants do not take (1) and (2), but economists do.  and this will affect the computation of profit.

5. 5 The Firm Profit =  = Total Revenue (TR) — Total Cost (TC) (if  < 0, then we call it a “loss”.) Economic  = TR — Total Economic Cost, where economic cost includes imputed cost. Profit  Since economic cost may be > accounting cost, then: economic profit may be < accounting profit.

6. 6 The Firm An asset that has no resale value, no used market. — has no opportunity cost. Sunk Cost — should not influence a business decision about what is currently the most profitable thing to do.

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