Essential Business & Economic Concepts

Supply Defined

Supply: The amount of goods and services producers are willing to sell at various prices at a particular time.

Market Supply

Market supply: The total output of all the individual companies within a market.

Law of Variable Proportions

Law of variable proportions: Highlights the relationship between the input of a factor of production and the supply of a good or service.

Production Schedule

Production schedule: Shows how the quantity supplied changes as the number of workers increases.

Stages of Production

Stage of production: Is based on a change in marginal product, including diminishing returns.

Elasticity of Supply

Elasticity of supply: Is measured by how quickly the quantity supplied changes as a result of a change in price.

Understanding Productivity

Productivity: Increases if the same quantity of input produces more output and decreases if the same quantity of input produces less output.

Marginal Product

Marginal product: The extra output or change in the total product caused by adding a worker.

Quantity Supplied Changes

Rises and falls: This concept describes how the quantity supplied can change. For instance, when the quantity supplied is likely to decrease, sellers will now supply fewer products at the same price levels.

Defining Price

Price: The value in money of a good or service.

Equilibrium Price

Equilibrium price: Is where the quantity demanded equals the quantity supplied.

The Business Firm

Business firm: An organization that brings together the factors of production to produce and distribute goods and services.

Roles of Business Firms in a Market Economy

Business firms play crucial roles in a market economy:

• They produce a good or service that is in demand. In this role, a firm is a seller of goods and services.
• Firms are also buyers of goods and services; they purchase or rent three factors of production: natural resources, labor, and capital resources.

Understanding Net Income

Difference between a firm’s total sales and its net income: Net income is the amount of money a firm has left after expenses and taxes have been paid. This is distinct from total sales, which do not account for these deductions.

Net income: The amount a firm has left after expenses and taxes have been paid.

Impact of Mergers on Business Firms

How do mergers affect business firms: Mergers can allow the new firm to increase its capabilities without significantly increasing its management costs. In addition, the new company may also take advantage of economies of scale by buying in large quantities or by consolidating manufacturing.

Cash Flow Calculation

Cash flow: Is determined by adding net income plus non-cash charges like depreciation.

Understanding Depreciation

Depreciation: An expense a firm takes to account for wear and tear on its machines and other capital goods.

The Income Statement

An income statement is a report showing a business’s sales, expenses, and profit for a certain period of time.

What is a Franchise?

Franchise: Contracts in which a company sells individuals or other companies the right to use its name and business model and sell its products or services in return for a fee.