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Ch09 - CHAPTER 9 Organizing Production After studying this...

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Organizing Production CHAPTER 9
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After studying this chapter you will be able to Explain what a firm is and describe the economic problems that all firms face Distinguish between technological efficiency and economic efficiency Define and explain the principal-agent problem and describe how different types of business organizations cope with this problem Describe and distinguish between different types of markets in which firms operate Explain why markets coordinate some economic activities and firms coordinate others
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Spinning a Web Tim Berners-Lee’s idea, the World Wide Web, has provided a platform for the creation of thousands of profitable businesses from tiny owner-operated firms to giant multinationals. This chapter explains the role of firms and the choices they make to cope with scarcity.
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The Firm and Its Economic Problem A firm is an institution that hires factors of production and organizes them to produce and sell goods and services. The Firm’s Goal A firm’s goal is to maximize profit. If the firm fails to maximize profits it is either eliminated or bought out by other firms seeking to maximize profit.
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The Firm and Its Economic Problem Measuring a Firm’s Profit The firm’s goal is to report profit so that it pays the correct amount of tax and is open and honest about its financial situation with its bank and other lenders. Accountants measure a firm’s profit using Internal Revenue Service rules based on standards established by the Financial Accounting Standards Board. Economists measure profit based on an opportunity cost measure of cost.
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The Firm and Its Economic Problem Opportunity Cost A firm’s decisions respond to opportunity cost and economic profit. A firm’s opportunity cost of producing a good is the best, forgone alternative use of its factors of production, usually measured in dollars. Opportunity cost includes both Explicit costs Implicit costs
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The Firm and Its Economic Problem Explicit costs are costs paid directly in money. Implicit costs are costs incurred when a firm 1. Uses its own capital. 2. Uses its owners’ time or financial resources. The firm can rent capital and pay an explicit rental cost. Or the firm can buy capital and incur an implicit opportunity cost of using its own capital, called the implicit rental rate of capital.
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The Firm and Its Economic Problem The implicit rental rate of capital is made up of 1. Economic depreciation 2. Interest forgone Economic depreciation is the change in the market value of capital over a given period. Interest forgone is the return on the funds used to acquire the capital.
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The Firm and Its Economic Problem Cost of Owner’s Resources The owner often supplies entrepreneurial ability and labor.
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