3-6-09 - Microeconomics Class Notes 3/6/09 Why do firms...

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Microeconomics – Class Notes – 3/6/09 Why do firms exist? 2 Major categories : 1. Division of Labor / Economies of Scale / Specialization [reduce production costs] 2. Reduce Transaction costs Ownership vs. control Owners: shareholders o Want stock returns to be high Controllers: o Want profits to be high o Upper level management We want to align the goals of owners and controllers Production: Production function: Q(K, L, M) Is a function of 3 broad variables o K – Capital – land, buildings, equipment o L – Labor (part-time, full-time, etc.) o M – Materials – intermediate goods, raw goods, materials, parts, etc.
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We are going to just focus on the production function as a function of just Capital and Labor We can think about capital and labor as being substitutes o The output per laborer increases as the amount of capital increases per worker thus we are not worried about capital-intensive processes o Productivity is a lot greater when capital is high We can substitute labor for capital, but not to an infinite extent
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This note was uploaded on 06/03/2009 for the course ECON 200 taught by Professor Nonnenmacher during the Spring '09 term at Allegheny.

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3-6-09 - Microeconomics Class Notes 3/6/09 Why do firms...

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