Business Costs

Key Terms

fixed cost: cost that doesn't change with output produced; eg. salaries
variable cost: cost that changes with output produced; eg. wages

profit maximization: the point when increasing the level of output won't increase profit (the average cost will begin to rise again)

normal profit: when profit = opportunity cost (business breaks even)
abnormal profit: when a business makes more revenue than its total cost, including opportunity cost

Formulae

revenue = quantity produced * cost per unit

total cost = fixed cost + variable cost

profit = total revenue - total cost

average revenue = total revenue / output

average total cost = total cost / output

marginal cost = change in total cost / change in output

Economies of Scale

Economies of scale are the cost advantages that a business can obtain due to expansion.

Internal Economies of Scale
These are the lower unit costs that a single firm can gain due to expansion.

Technical
- specialization: large organizations can employ specialized labor

Commercial
- large firms can negotiate favorable prices as a result of buying in bulk
- large firms may have advantages in keeping prices higher because of their market power

Financial
- large firms are able to negotiate cheaper finance deals
- large firms are able to be more flexible about finance (eg. share options, rights)

Managerial
- use of specialists (eg. accountants, marketing, lawyers, human resources, etc.)

Risk-Bearing
- diversification
- markets across regions/ countries
- research and development

External Economies of Scale
These are the benefits to the company from the area that they are in.

- supply of skilled labor
- reputation
- local knowledge and skills
- infrastructure
- training facilities

Diseconomies of Scale
These are the disadvantages of large scale production that can lead to increasing average costs.

- problems with management
- maintaining effective communication
- coordinating activities (often across the world)
- de-motivation and alienation of staff
- divorce of ownership and control

Business Organization

We all know there are many different kinds of business organizations around the world, but what kinds of business organizations are there? How do that differ from each other? What are their main aims?

Every business organization has either limited or unlimited liability. Limited liability is when the financial liability of each shareholder of the firm for the firm's debts and obligations is limited ; in other words, the owner and the company are regarded as two different legal entities. For example, if the company goes bankrupt, the owner will only lose what he or she invested in the company.

Unlimited liability is the exact opposite. Unlimited liability is when there is an indefinite extent of liability to pay a firm's debts or obligations, which might extend beyond the investments by the owner, partner or shareholders. He or she is also held responsible for claims against the business. For example, if a factory produces byproducts that may have damaged people's health, the company can be sued and the owner may have to pay for the damage caused.

Starting private and public limited companies is different. There are different procedures that have to be taken before the companies can engage in trade.

• Memorandum of Association
• Article of Association
• Registrar of Companies
• Certificate of Incorporation
  

For a public limited comapany to establish, there are two more procedures to be taken:

• Statutory Declaration
• Publish of Prospectus.
  

The biggest difference between a private limited company and a public limited company is how shares are issued and sold. A private limited company can only sell shares to people they know like workers, families, or familiar acquaintances. On the other hand, a public limited company can sell shares directly on the stock market, so strangers can also become an owner of your company, no matter how little influence they have. Also, public limited companies' first issuing of shares on the stock market is called floating, and additional floats are issued to make more money.

There are many other organizations such as sole trader, partnership, franchises, co-operatives, multinationalsand, trade union and charities.

SOLE TRADER!!

A sole trader is business owned by one person. It may have one or more employees.
The advantages of setting up as a sole trader are:

• Total control of the business
• Cheap and easy to start
• Full profit
• Business affairs are private

The reasons why sole traders are often successful:

• Specialist services
• Sensitive to the needs of customers
• Cater for the needs of local people

Disadvantages of setting up as a sole trader:

• Unlimited liability
• Difficult to rise finances
• Difficult to reach economies of scale
• No continuity

PARTNERSHIPS!!

A partnership has 2 or more owners in the company. In addition, a partnership is normally set up using a "Deed of Partnership", which is a legal document that contains:

• Amount of capital each partner should provide
• How profits and losses should be divided
• How many votes each partnet have
• How the business is brought to an end or how a partner leaves

The advantages of setting up a partnership:

• Spreads the risk
• May bring more capital, resources and skills
• Increase credibility with potential customers and suppliers

FRACHISE!!

A franchise is where a business sells a sole proprietor the right to set up a business using their name. The franchisor is the business whose sells the right to another business to operate a franchis. A franchise is bought by the franchisee. Once they have purchased the franchise they have to pay a proportion of their profits to the franchiser on a regular basis. Depending on the business involved, the franchiser may provide training, management expertise and national marketing campaigns.

The advantages setting up a frachise:

• Support is given by the frachiser
• May benefit from national advertising, format, established name
• Less investments is required
• Able to run with less risk

A co-operative is a business organization owned and operated by a group of individuals for their mutual benefit. There are three main types of co-operatives:

• Retail Co-operatives
• Market Co-operatives
• Worker Co-operatives

Multinational is a company that operates in more than one country in the world.