Chapter 6 - Chapter 6 Firms and Production 1 Firms and production[1 Why study firms US national production(GDP Firms 84 Government 11 Nonprofit

Chapter 6 - Chapter 6 Firms and Production 1 Firms and...

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Chapter 6. Firms and Production 1. Firms and production [1] Why study firms? US national production (GDP) Firms: 84% Government: 11% Nonprofit organizations: 4% Private households: < 0.2% What is a firm: A unit or organization that convert inputs (raw material, workers, machine) into outputs. (Let’s see firm as a black box.) 3 types of firms: sole proprietorship, partnership and cooperation. Sole Proprietorship: firms owned and run by a single individual. Partnership: firms jointly owned and controlled by two or more people. The owners operate under a partnership agreement. Corporations: firms owned by shareholders in proportion to the numbers of shares of stock they hold. The shareholders elect a board of directors who run the firm. In turn, the board of directors usually hires managers who make short-term decisions and long-term plans. [2] The owner will make decisions for a firm. His objective is to maximize profit ( ). = Revenue – Cost Revenue = pq A necessary condition for maximizing profit is to have an efficient production process. An efficient production process is defined that the firm cannot produce more output with the existing knowledge, or that the firm cannot produce same output by using less inputs. If a firm is produced efficiently, then it cannot be maximizing its profit. There are three major categories of inputs: Capital (K): building, machine, equipments, etc. Labor (L): managers, skilled workers, or unskilled workers. Material (M): oil, water, steel, iron, etc. For simplicity, we study firms using L and K as inputs The function of a firm is summarized in its production function . q = f(L, K) Where q is the maximum amount of output produced by using L units of labor services and K units of labor. (Note: “Maximum” has implied that production function is an efficient process). [3] Time and firms’ ability to vary inputs Roughly, we divide a firm’s time frame into two time periods: long-run and short-run. Long-run : all inputs can be changed – both labor and capital. Short-run : some inputs are not changeable – capital is fixed, labor can change.
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This is because is generally easier to hire and fire workers instead of expand or shrink plant sizes.
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