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perloff_0321374584_IM_Part1_C06

perloff_0321374584_IM_Part1_C06 - Chapter 6 Firms and...

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Chapter 6 Firms and Production Chapter Outline 6.1 The Ownership and Management of Firms Ownership of Firms The Management of Firms What Owners Want 6.2 Production Production Functions Time and the Variability of Inputs 6.3 Short-Run Production: One Variable and One Fixed Input Total Product Marginal Product of Labor Average Product of Labor Graphing the Product Curves Law of Diminishing Marginal Returns 6.4 Long-Run Production: Two Variable Inputs Isoquants Substituting Inputs 6.5 Returns to Scale Constant, Increasing, and Decreasing Returns to Scale Varying Returns to Scale 6.6 Productivity and Technical Change Relative Productivity Innovations Teaching Tips Before beginning the material in Chapter 6, you might remind students that the course is broken roughly into thirds, and that this material begins the second portion of the course, in which activity inside the firm is discussed in detail. Throughout Chapters 6 and 7, it is helpful to students if you emphasize the conceptual parallels between the mechanics of cost minimization, isoquants, and isocost lines to those of utility maximization, indifference curves, and budget lines.
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46 Part 1 Teaching Aids Because students take for granted that firms exist, you may want to begin with a discussion of why firms do exist. If you begin by asking the class to define the purpose of a firm, “to make money” will likely be the most frequently offered response, although some may also offer answers related to tax advantages or limitation of liability. In an effort to get students to think about firms as a mechanism for reducing transaction costs, you might ask the class to consider the following example. Suppose I want to make money in the landscaping industry. But instead of starting a firm, each morning I rent a U-haul truck, rent several lawn mowers, trimmers, and rakes, and drive up and down the street yelling: “Who wants to cut lawns today?” Once I have enough workers, I ring doorbells to get customers, collect the money, pay the workers, pay for the rented capital, and put the residual in my pocket. Thus, I am making money, but there is no firm. At this point, students may not remember the term transaction costs from Chapter 1, but they should be able to suggest lots of ways that the residual (profits) could be increased by doing things such as purchasing some or all of the capital, hiring permanent employees, and contracting with customers. You might want to conclude this with counterexamples of instances where it is better to use the market rather than internalize all transactions related to a final product. Suppose, for example, that a firm that manufactures engines needs castings. If the quality of the castings drops off, the firm can seek other suppliers, which is the foundry owner’s problem. If the firm owns the foundry, problems at the foundry are internal to the firm and must be solved by management, rather than through the use of the market. This discussion can lead you into the material on ownership and management that begins the chapter, or to a discussion of out-sourcing and mergers that are covered later in the text.
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