Production & Business OrganizationChapter 6Samuelson, Nordhaus 18e

Production & Business OrganizationThe relationship between the quantity of output (such as wheat, steel, or automobiles) and the quantities of inputs (of labor, land, and capital) is called the production function.

Total product is the total output produced.

Average product equals total output divided by the total quantity of inputs.

Marginal Product Is Derived from Total ProductChapter 6 Figure 6-1

Production & Business OrganizationAccording to the law of diminishing returns, the marginal product of each input will generally decline as the amount of that input increases, when all other inputs are held constant.

Total Product, Marginal Product & Average ProductChapter 6 Table 6-1

Production & Business OrganizationThe returns to scale reflect the impact on output of a balanced increase in all inputs.

A technology in which doubling all inputs leads to an exact doubling of outputs displays constant returns to scale.

When doubling inputs leads to less than double (more than double) the quantity of output, the situation is one of decreasing (increasing) returns to scale.

Diminishing Returns in Corn ProductionChapter 6 Figure 6-2

Production & Business OrganizationTechnological change refers to a change in the underlying techniques of production, as occurs when a new product or process of production is invented or an old product or process is improved. In such situations, the same output is produced with fewer inputs or more output is produced with the same inputs.

Technological change shifts the production function upward.

Technological Change Shifts Production Function UpwardChapter 6 Figure 6-3

Value of Networking Increases as Membership RisesChapter 6 Figure 6-4

Business OrganizationsBusiness firms are specialized organizations devoted to managing the process of production.

Business OrganizationTypes of Business Organization

There are three types of business organization: Proprietorship Partnership Corporation

Business OrganizationProprietorship

A proprietorship is a firm with a single owner who has unlimited liability, or legal responsibility for all debts incurred by the firmup to an amount equal to the entire wealth of the owner.The proprietor also makes management decisions and receives the firms profit.Profits are taxed the same as the owners other income.

Business OrganizationPartnership

A partnership is a firm with two or more owners who have unlimited liability.Partners must agree on a management structure and how to divide up the profits.Profits from partnerships are taxed as the personal income of the owners.

Business OrganizationCorporation A corporation is owned by one or more stockholders with limited liability, which means the owners who have legal liability only for the initial value of their investment.The personal wealth of the stockholders is not at risk if the firm goes bankrupt.The profit of corporations is taxed twiceonce as a corporate tax on firm profits, and then again as income taxes paid by stockholders receiving their after-tax profits distributed as dividends.

Business OrganizationPros and Cons of Different Types of Firms

Each type of business organization has advantages and disadvantages. Table 10.4 summarizes the pros and cons of different types of firms.

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