6 - MS&E 241: ECONOMIC ANALYSIS Thomas A. Weber 6....

Info iconThis preview shows pages 1–5. Sign up to view the full content.

View Full Document Right Arrow Icon
MS&E 241: ECONOMIC ANALYSIS Thomas A. Weber 6. Theory of the Firm – Introduction Winter 2009 Stanford University Copyright © 2009 T.A. Weber All Rights Reserved -2- MS&E-241-Winter-2009-TAW AGENDA Introduction Production Sets Profit Maximization: Some Intuition The Firm’s Cost Function Key Concepts to Remember
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
-3- MS&E-241-Winter-2009-TAW Production Side of the Economy Including … Corporations (… General Motors, Microsoft, Virgin Atlantic) Public utilities (… Pacific Gas and Electric Co., Metropolitan Water District) Partnerships (… law firm, McKinsey, start-up firm) Small businesses (… retail store, individual consultant, restaurant, internet radio station) Home production (… home improvement, prepare meals) Educational institutions (… UC Berkeley, Stanford U,) Non-profit organizations (… community hospital, YMCA) THEORY OF THE FIRM -4- MS&E-241-Winter-2009-TAW Possible Objectives Maximize (Expected) Profit Maximize (Expected) Utility (which takes profits as one argument) Minimize Cost (e.g., given fixed outputs) Feasible Actions Production possibilities Legal constraints Competitive necessities Firm chooses a most preferred action from the set of all feasible actions. THE FIRM AS AN OPTIMIZER
Background image of page 2
-5- MS&E-241-Winter-2009-TAW Maximization of (Expected) “Utility” (Objective Function) Could include accounting profits as only one variable among several others (such as a measure of output) - Example: a community hospital may put a high value on accounting profits if it is losing money (negative profit), and a high value on the provision of medical services otherwise Accounting Profit Amount of Medical Services Insolvency Indifference curves A FIRM’S POSSIBLE OBJECTIVES: EXAMPLE -6- MS&E-241-Winter-2009-TAW THE FIRM AS A BLACK BOX Compare Inflows and Outflows Inputs Outputs Cost of Inputs $$$ Revenues $$$ t = 0,1,2, …
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
-7- MS&E-241-Winter-2009-TAW THE FIRM AS A BLACK BOX (Cont’d) Converts Inputs to Outputs Inputs z Outputs q = F(z ) t = 0,1,2, … Production Function F Stream z = (z 0 ,z 1 ,z 2 , …) Stream q = (q 0 ,q 1 ,q 2 , …) q t = F t (z ) Costs: C t (q ) Revenues: R t (q ) Profit at time t: Π t (q ) = R t (q ) – C t (q ) !!! -8- MS&E-241-Winter-2009-TAW PRODUCTION FUNCTION The production function at time t might depend on current and/or (anticipated) future inputs, ,...) , , ( ) ( 2 1 0 z z z F z F q t t t = = Question: Why? Answer: There are many answers real-world phenomena which may produce such dependencies, such as Learning-Curve Effects (1) Demand Effects (e.g., Saturation) In some practical applications current output depends only on current input, i.e., ) ( ) ( t t t t z F z F q = = (1) The commander of Wright-Patterson Air Force Base in Ohio observed in 1925 that the required direct labor hours for the assembly of a plane decreased in the number of planes built. First academic observations include Hirschman, W.B. (1964) “Profit from the Learning Curve,” Harvard Business Review, Jan/Feb, and Arrow, K.J. (1962) “Economic Welfare and the Allocation of Resources to Invention,” in: Nelson, R. (ed.) The Rate and Direction of Inventive Activity: Economic and Social Factors , Princeton University Press, Princeton, NJ.
Background image of page 4
Image of page 5
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 23

6 - MS&E 241: ECONOMIC ANALYSIS Thomas A. Weber 6....

This preview shows document pages 1 - 5. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online