PAM_2000_Spring_2009_Lecture_10

PAM_2000_Spring_2009_Lecture_10 - PAM 2000 Lecture 10...

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    PAM 2000 Lecture 10 Agenda Firms and ownership Firm’s objectives Productive efficiency Short run versus long run Marginal, total and average product of labor Isoquants Returns to scale
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    Firms and Ownership (con’t) Recall: Type of firm is determined by the nature of its residual claims Corporation: RCs are tradable, alienable and divisible Corporation is a very successful form Accounts for about 90% of all sales, even though only 20% of all firms are corporations
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    Firms and Ownership (con’t) For many types of firms, the people running it are not the same people that own it This creates an “agency problem” Managers may not always run the firm in the interest of owners
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    Costs of the Corporate Form OWNERS (Stockholders) residual claimants BOARD OF DIRECTORS (elected by proxy) CEO (appointed by board) TOP MANAGERS (appointed by CEO) MIDDLE MANAGERS
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    Firms and Ownership (con’t) We will now assume that the firm’s managers and its owners are the same person Later we will address the agency problem
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    The Objective of Firms Goal of privately owned, for-profit firms is to profit maximize: Max π = R – C Where R = revenue = pq and C = costs
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    The Objective of Firms (con’t) Note: Profit maximization implies cost minimization If a firm is not maximizing profits, it is not minimizing costs That means producing a given level of output using the least amount of inputs possible
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    The Objective of Firms (con’t) Note: Profit maximization implies cost minimization If a firm is not maximizing profits, it is not minimizing costs That means producing a given level of output using the least amount of inputs possible
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     Productive Efficiency P roductive efficiency : Producing a given level of output with the least amount of inputs possible Same as saying that no more output can be produced using the current inputs Also called technical efficiency
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