Production & Business

Organization
Chapter 6
Samuelson, Nordhaus 18e
 Production & Business Organization
► The 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.
 Chapter 6

Marginal Product Is Derived Figure 6-1

from Total Product

 Production & Business Organization
► According 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.
 Chapter 6

Total Product, Marginal Product &

Table 6-1

Average Product
 Production & Business Organization
► The 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.
 Chapter 6
Figure 6-2

Diminishing Returns in Corn Production

 Production & Business Organization
► Technological 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.

► Technologicalchange shifts the production

function upward.
 Chapter 6

Technological Change Shifts Figure 6-3

Production Function Upward

 Chapter 6

Value of Networking Increases as

Figure 6-4

Membership Rises
 Business Organizations
► Businessfirms are specialized organizations
devoted to managing the process of
production.
 Business Organization

► Types of Business Organization

 There are three types of business
organization:
 Proprietorship
 Partnership
 Corporation
 Business Organization
► Proprietorship
 A proprietorship is a firm with a single owner who has
unlimited liability, or legal responsibility for all debts
incurred by the firm—up to an amount equal to the
entire wealth of the owner.
 The proprietor also makes management decisions and
receives the firm’s profit.
 Profits are taxed the same as the owner’s other
income.
 Business Organization
► Partnership
 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 Organization
► Corporation
 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 twice—once 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 Organization
► Pros 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.
Read Chapter 7