Lecture 8 _Feb 11_ - Economics 100A Lecture #8: Thursday,...

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Economics 100A Lecture #8: Thursday, Feb. 11 The firm Production functions Input substitutability
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The Firm The most basic source of supply An organization that converts “inputs” (labor, capital, materials, knowledge) into “outputs” (products and services) Sometime not easy to identify What about volunteer activity? What about open source software development?
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Sources of U.S. national product firms: 84% governments: 12% compare: 3% in Bengladesh, 90% in Algeria nonprofit institutions: 4% households: 0.2% ignores non-market services (e.g., cleaning, repair)
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Legal forms of for-profit firms Sole proprietorships owned and operated by a single individual Partnerships jointly owned and controlled by two or more “partners” Corporations owned by shareholders in proportion to the shares held, elect a board of directors to protect their interests including the hiring of managers
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<20% 90% Corporations 7% 5% Partnerships 75% 6% Sole proprietorships Number of Firms Business Sales Relative sizes of legal forms
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Objective of the firm Motivations of participants Conflicting goals of owners, directors, managers and other employees Profit sharing, options, pensions mitigate the differences Owners want to maximize: Profit = revenue – cost or = R - C Over time, maximize net present value (NPV) of firm: T T r r r 1 3 2 2 1 1 1 ... 1 1 1 1
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Production Production process: transforms “inputs” or “factors of production” into “outputs” Common types of inputs: Capital ( K ): services from buildings and equipment Labor ( L ): skilled and unskilled workers in hours/year Land ( T ): acreage, location Materials ( M ): raw and processed materials Energy ( E ): electricity, natural gas Knowledge: patents, trade secrets, know-how For now, just consider production of single output using one or more inputs …
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Production function Relationship between quantities of inputs and quantities of outputs that can be produced—given current knowledge about technology and organization “Black box” view of production: Inputs Outputs
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Lecture 8 _Feb 11_ - Economics 100A Lecture #8: Thursday,...

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