Chapter 6 Outline - Chapter 6 Four types of decisions that...

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Chapter 6 Four types of decisions that owners of firms have to make: 1. How a firm is owned and managed 2. How to produce 3. How to expand output in both the short run and the long run 4. Determine how large it wants to grow Main Topics 1. The ownership and management of firms: Decisions must be made as to how a firm is owned and run 2. Production: A firm converts inputs into outputs using one of possibly many available technologies 3. Short-run production: One variable and one fixed input: In the short run, only some inputs can be varied, so the firm changes its outputs by adjusting its variable inputs 4. Long-run production : Two variable inputs: The firm has flexibility in how it produces and how it changes its output level in the long run when all factors can be varied 5. Returns to scale : How the ration of output to input varies with the size of the firm is an important factor in determining the size of a firm 6. Productivity and technical change : The amount of output that can be produced with a given amount of inputs varies across firms and over time 6.1 The Ownership and Management of Firms Firm: an organization that converts inputs such as labor, materials, energy, and capital into outputs, the goods and services that it sells Sole proprietorships are firms owned and run by a single individual Partnerships are businesses jointly owned and controlled by two or more people Corporations are owned by shareholders in proportion to the numbers of shares of stock they hold Limited liability: condition whereby of the personal assets of the owners of the corporation cannot be taken to pay a corporation’s debts if it goes into bankruptcy Sole proprietors have unlimited liability Partners share liability In small firms the owner usually manages the firm’s operations In larger firms, corporations and larger partnership runs the company Profit: the difference between revenues, R, and costs, C: π = R-C Efficient production or technological efficiency: situation in which the current level of output cannot be produced with fewer inputs, given existing knowledge about technology and the organization of production If the firm does not produce efficiently, it cannot be profit maximizing-so efficient production is a necessary condition for profit maximization
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6.2 Production A firm uses a technology or production process to transform inputs or factors of production into outputs Capital (K): Long-lived inputs such as land, buildings, and equipment Labor (L): Human services such as those provided by managers, skilled workers, and less-skilled workers Materials (M): Raw goods and processed products Production function: the relationship between the quantities of inputs used and the maximum quantity of output that can be produced, given current knowledge
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Chapter 6 Outline - Chapter 6 Four types of decisions that...

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