Economics Chapter 4 PDF

**[6.1 TYPES OF FIRMS]** 1. **[Types of firms]** a. **Sole proprietorship** A firm owned by a single individual and not organized as a corporation. b. **Partnership** A firm owned jointly by two or more persons and not organized as a corporation. c. **Corporation*...

**[6.1 TYPES OF FIRMS]** 1. **[Types of firms]** a. **Sole proprietorship** A firm owned by a single individual and not organized as a corporation. b. **Partnership** A firm owned jointly by two or more persons and not organized as a corporation. c. **Corporation** A legal form of business that provides owners with protection from losing more than their investment should the business fail. 2. **Asset** Anything of value owned by a person or a firm. 3. **Limited liability** A legal provision that shields owners of a corporation from losing more than they have invested in the firm. 4. **Corporate governance** The way in which a corporation is structured and the effect that structure has on the corporation's behavior. 5. **Separation of ownership from control** A situation in a corporation in which the top management, rather than the shareholders, controls day to-day operations. 6. **Principal--agent problem** A problem caused by an agent pursuing his own interests rather than the interests of the principal who hired him. **[6.2 HOW FIRMS RAISE FUNDS]** 1. **Indirect finance** A flow of funds from savers to borrowers through financial intermediaries such as banks. Intermediaries raise funds from savers to lend to firms (and other borrowers). 2. **Direct finance** A flow of funds from savers to firms through financial markets, such as the New York Stock Exchange. 3. Direct finance generally takes the form of one of two **financial securities:** a. **Bond** A financial security that represents a promise to repay a fixed amount of funds. b. **Stock** A financial security that represents partial ownership of a firm. 4. **Coupon payment** An interest payment on a bond. 5. **Interest rate** The cost of borrowing funds, usually expressed as a percentage of the amount borrowed. 6. **Dividends** Payments by a corporation to its shareholders. 7. **[three principal methods of raising funds:]** c. **retained earning** d. **recruit additional owners** e. **borrow** **[6.3 USING FINANCIAL STATEMENT TO EVALUATE A CORPORATION]** 1. **Liability** Anything owed by a person or a firm. 2. **Income statement** A financial statement that shows a firm's revenues, costs, and profit over a period of time. 3. **Accounting profit** A firm's net income, measured as revenue minus operating expenses and taxes paid. 4. **Opportunity cost** The highest-valued alternative that must be given up to engage in an activity. 5. **Explicit** **cost** A cost that involves spending money. 6. **Implicit cost** A nonmonetary opportunity cost. 7. **Economic profit** A firm's revenues minus all of its implicit and explicit costs. 8. **Balance sheet** A financial statement that sums up a firm's financial position on a particular day, usually the end of a quarter or year.