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
Figure 6-1

Marginal Product Is Derived

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
Table 6-1

Total Product, Marginal

Product & Average Product

Production & Business

Organization
The

returns to scale reflect the impact on

output of a balanced increase in all inputs.

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.

Technological

change shifts the production

function upward.

Chapter 6
Figure 6-3

Technological Change Shifts

Production Function Upward

Chapter 6
Figure 6-4

Value of Networking Increases

as Membership Rises

Business Organizations
Business

firms 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 firms profit.
Profits are taxed the same as the owners 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 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 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