chapter8 - The Business Firm: A Prologue to the Theory of...

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Copyright © 2007, .learn, Inc. All rights reserved. The Business Firm: A Prologue to the Theory of Market Supply D o you work part time or have a summer job? If so, you know you don’t work just for the fun of it. You may enjoy your job, and it may be enabling you to acquire skills that will be valuable to you in your postcollege career. But whether you need income to meet college expenses or to provide yourself with extras, because you’re a rational person, your primary objective in working is to earn income. By the same token, businesses don’t make goods and services available in markets for the pleasure of doing good deeds. Instead, their purpose is to earn income for their owners. Like your personal goals, the goals of a business can be multifaceted. However, much of economic theory about the behavior of businesses assumes their primary goal is to make profits—just as your primary goal as a rational consumer is to maximize your satisfaction. In their quest for profits, business owners often face many competitors. Just think how many companies manufacture jeans, DVDs, or hair care products! A firm’s opportunities to make profits depend on demand for its product, its competition, and its cost of making products available. In this chapter, we examine the characteristics of businesses and the way profit is measured. We discuss the functions of the firm and its organization, and we consider the simplifications necessary to construct a model that explains the firm’s behavior. From a practical standpoint, we also look at the advantages and disadvantages of different forms of business organization. After reading this chapter, you should be able to 1. Outline the advantages of alternative forms of business organization: the sole proprietor- ship, the partnership, and the corporation. 2. Explain the functions of firms, and how vari- ous aspects of production and distribution are integrated within a single firm. 3. Present a simplified view of the firm that’s useful in constructing a model that explains market supply. 4. Show how the concept of opportunity cost must be applied to accurately measure the profit of a firm. Concept Preview
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2 Product Markets Copyright © 2007, .learn, Inc. All rights reserved. The Business Firm A business firm is an organization under one management set up for the purpose of earning profits for its owner by making one or more items available for sale in markets. The terms firm, business , and enterprise are often used interchangeably to mean the same thing. As of 2001, there were more than 25 million business firms operating in the United States. Firms operate out of one or more plants, physical structures or locations at which a firm’s owners or employees conduct business. For a manufacturing firm like General Motors, the plant is one or more factories. For a restaurant like Taco Bell, the plant is the structure where employees produce meals and serve them to customers. A farmer operates an agricultural firm, whose plant is the location or locations where the farmer has fields,
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chapter8 - The Business Firm: A Prologue to the Theory of...

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