1. Business organization and behavior
PRODUCER
Business organization and behavior

2. Forms of business organization
an individual proprietorship – a business owned by an individual, who is fully entitled to the profit earned by the business and fully responsible for any losses the business incurs
A partnership a business jointly owned by two or more people who share its profit. All owners, or partners are jointly responsible for any losses the business incurs
A corporation is an organization legally permitted to carry on certain activities, such as running a railroad or producing a newspaper. The owners of corporation are liable only for their investment in the corporation, even if these are not sufficient to cover the losses it incurs. Ownership of corporation divided among its shareholders

3. Profit maximization
Owners of all forms of business want the firms maximize profits
the assumption that business maximizes profit subject to two criticisms: 1. business decisions complex and often are made on the basis of little information 2. a large number of shareholders cannot effectively control corporate management.
Managers free to pursue their own goals

4. Do business maximize?
Profit maximization an outcome of competition process
Other than profit maximization goals: the size of the firm (managers’ salaries usually higher the larger the firm); blocking an attempt to take over badly run firm by an outsider
How to motivate managers to maximize profit? Bonus schemes increasing their salaries, payment in part with stock in the company
But generally managers who do not serve shareholder interests are less likely to retain their jobs than are those who do

5. Firm’s social objectives
Business social responsibility: donations to charity, providing funds for public TV or act in other philanthropic ways
Are this actions benefitting shareholders?
Indirect method to increase profits
Some theories claim: business more like citizens than profit maximizing machines

6. Some definitions
Revenue: amount firm receives from the sale goods and services during a certain period
Costs: the expenses of producing goods and services sold during this period
Profit (net income): the excess of revenue over costs

7. The income statement revenue $ 1.000 000 Minus expenses (or costs)
Wages paid to people rented out $
Newspaper advertising $
Office rent $
Wages for office workers $
Other office expences $
Depreciation on typewriters
$ 3.000
Interest on bank loan $
Net income (profit before tax) $
Corporate income tax $
Profit after tax

8. The Balance Sheet assets liabilities cash $ 40.000 Accounts payable$ $
Salaries payable $
inventories $
Mortage from insurance company $
Factory building $
Loan from the bank $
equipment
Total liabilities $
Original cost - depreciation
$ $ $
Net worth $
Total assets $
Total liabilities and net worth

9. Accounting and market value
Intangible assets - assets that do not appear on its balance sheet, ignored by accountants: skills of employees and their ability to work, good prospects for future growth; reputation with customers and suppliers
the company could be sold for more than its net worth

10. Accounting cost and opportunity cost
The accounting costs on income statement omit real economic cost of doing business
Accounting profit>economic profit
Accountants focus on costs that can be easily measured; for an economists – opportunity cost is important
Opportunity cost of using of any resource: the amount that could have been earned by putting that resource to its best alternative use
examples: opportunity cost of owners labor, opportunity cost of the owners financial capital

11. Technical and economic efficiency
Method of production is „technical” efficient if: 1. there is no other method that uses less of at least one input and no more of any other output to produce a given level of output; or 2. the output is the maximum possible using the specified amounts of inputs
Both say: no waste
The economically efficient method – method that minimizes the opportunity cost of the inputs; all costs considered

12. Production in the short run
The total product curve: the relationship between the input of variable factor and the resulting level of output produced
The marginal product of any variable factor: addition to the output obtained by employing an additional unit of that factor
The law of diminishing returns: if the quantities of some factors are fixed, the marginal product of any variable factor will, beyond some level of input, decline as the input of that factor is increased

13. Total and marginal products of labour
Labour input (number of workers)
Total product
Marginal product of labour 1
0.8 2
1.8
1.0 3
3.1
1.3 4
4.3
1.2 5
5.4
1.1 6
6.3
0.9 7
0.7 8
7.5
0.5 9
7.8
0.3

14. The law of diminishing returns
If the quantities of some factors are fixed, the marginal productivity of any variable factor (labor) will, beyond some level of output , decline as the input of that factor is increased
The total cost curve becomes steeper as diminishing returns set in

15. Different types of cost
Fixed and variable costs: total costs (TC)=fixed costs (FC) + variable costs (VC)
Fixed costs that can not be avoided even by going out of business – sunk costs (investment in specialized equipment
Average variable cost AVC = VC/output
Average fixed costs AFC = AFX/output
Average total costs ATC = TC/output
Marginal costs MC = ∆TC/∆ output

16. Output and costs in „Global Production”
Labor input
(the cost of each unit labor=
$200)
Fixed cost (FC)
Variable costs (VC)
Total cost (TC)
Marginal cost (MC)
500 1
1.7
340
840 2
2.8
560
1060
220 3
3.6
720
1220
160 4
4.5
900
1400
180 5
5.6
1120
1620 6
7.0
1900
280 7
8.9
1780
2280
380

17. Average and marginal costs
output FC
AFC VC
AVC TC
ATC MC
500 - 1
340
840 2
250
560
280
1060
530
220 3
167
720
240
1220
407
160 4
125
900
225
1400
350
180 5
100
1120
224
1620
324 6 83
233
1900
317 7 71
1780
254
2280
326
380

18. Average and Marginal costs
Average costs (AC) increases when marginal costs (MC) higher than AC
Average costs (AC) diminishes when marginal costs (MC) lower than AC
Show that on the graph

19. Production and costs in the long run
The long run average costs curve (LAC) shows the lowest cost of producing any given level of output, allowing all factors of production to vary optimally to minimize costs
Very large firms experience economies and diseconomies of scale
Diseconomies of scale: workers become less motivated communication inside the firm becomes slower
Economies of scale (internal): 1. purchasing and selling more efficient, 2. financing less costly, 3. managerial experts in every area , 4. the best technology and equipment affordable , 5. marketing costs spread over large output
External economies of scale: benefits of the industry growth

20. The long-run average cost curve

21. diseconomies of scale Management more difficult as firm becomes larger
The localization of new companies worse: higher transport costs, higher costs of raw materials exploitation
Minimum efficient scale (MES) different in different industries

22. Revenue, costs and profits
Output
Price
Total revenue
Total cost
Profit
Marginal revenue
Marginal cost 1 25 10 15 21 13 2 23 46 14 3 20 60 38 22 12 17 4 18 72 55 5 75 6
12.5 98
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