Theory question 105
Business Organisations(a) Distinguish between a firm and an industry.
(b) Match the following characteristics to these business entities: sole proprietorship, partnership and public limited liability company: (i) much red tape and legal expense in starting the firm; (ii) owner(s) personal assets can be used to settle business debts; (iii) no specialized management; (iv) has a life independent of its owner(s); (v) permits some but not a great deal of specialization; (vi) greatest ability to acquire funds for expansion of the firm; (vii) unresolved disagreements among members can end the business; (viii) distinct separation of ownership and control of the business.
(c) With the aid of a diagram, explain the equilibrium position of a profit-maximizing firm that is making a loss in a monopolistic competition.
Show the model answer
(a) A firm is a single business unit producing goods or services; an industry is all the firms producing the same or similar products.
(b)(i) Public limited company; (ii) sole proprietorship (and partnership); (iii) sole proprietorship; (iv) public limited company; (v) partnership; (vi) public limited company; (vii) partnership; (viii) public limited company.
(c) The firm produces where MC = MR (MC cutting from below) and charges the price on its downward-sloping AR curve. If AC is above AR at that output, it makes a loss = (AC − AR) × output, shown as a rectangle between AC and price. Diagram: falling AR and MR, U-shaped MC and AC, AC above AR at the equilibrium output, loss area shaded. In the long run some firms leave until the rest earn normal profit.
A loss occurs when AC is above AR at the MC = MR output.