lecture09 - Key issues 1. ownership and management of firms...

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Unformatted text preview: Key issues 1. ownership and management of firms 2. production (using existing technologies) 3. short-run production: one variable and one fixed input 4. long-run production: two variable inputs 5. returns to scale 6. productivity and technical change Firm an organization that converts inputs (labor, materials, and capital) into outputs (goods and services) Sources of production: U.S. firms: 84% of U.S. national production government: 12% nonprofit institutions: 4% private households: 0.2% Government's share of production United States: 12% Ghana 37% Zambia 38% Sudan 40% Algeria 90% Bangladesh, Paraguay, and Nepal 3% Legal forms of for-profit firms sole proprietorships : owned and run by a single individual partnerships : jointly owned and controlled by two or more people corporations : owned by shareholders in proportion to the numbers of shares of stock they hold Corporations shareholders elect a board of directors who run the firm (Lucents directors) board of directors usually hire managers Business Sales Number of Firms Sole proprietorships 6% 75% Partnerships 5% 7% Corporations 90% <20% Limited Liability Companies (LLCs) due to changes in corporate and tax laws over last decade, LLCs have become common owners are liable only to the extent of their investment (as in a corporation) can play an active role in management (as in a partnership or sole proprietorship) when an owner leaves, the LLC does not have to dissolve as with a partnership Management of Firms small firm owner usually manages corporations and larger partnerships use managers Objectives conflicting objectives between owners, managers, and other employees employees want to maximize their earnings or utility owners want to maximize profit: = R - C R = revenue = pq = price x quantity C = cost Managers vs. owners The 2000 stock market crash followed by revelations that managers had perpetrated outrageous frauds (Enron, WorldCom) managers engaged in actions that directly benefited themselves at expense of unsuspecting shareholders often frauds involved misreporting of earnings to mislead investors and raise the price of the stock temporarily Other major frauds large telecommunication firm, WorldCom (now called MCI), was thrown into bankruptcy as a result of poor investments that were allegedly not properly handled in its accounts nor revealed WorldCom made a loan of about $400 million to its CEO Government acts (belatedly) SEC began to look into tightening accounting standards to prevent firms from reporting income in ways that, while technically accurate, distort a companies overall financial picture Congress passed the Sarbanes-Oxley law, which places increased reporting requirements on firms and attempts to limit possible conflicts of interest between managers and shareholders. Options use of options as a device to pay and motivate employees came under scrutiny...
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lecture09 - Key issues 1. ownership and management of firms...

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