lec11 - 2010-04-01 Chapter 7: The Firm and its Goals...

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2010-04-01 1 The Firm Goals Chapter 7: The Firm and its Goals Production side of the economy Corporations, partnerships, sole proprietorships • What are the advantages of large scale enterprises? –Economies of scale scope minimize transaction –Economies of scale, scope, minimize transaction costs • What are the disadvantages? –Communications and ability to manage large groups may eventually limit size –Disconnect between work and rewards (separation of owners from management) What Do Firms Seek to Accomplish? What are firms in business to do? Assumption: Firms seek to maximize profits Not revenues, reputation, or some other goal (a simplifying assumption) Economic Profit Distinguish Economic Profit from Accounting Profit Economic Profit = Total Revenue – Total Economic Cost Accounting Profit=Total Revenue – Total Cost of Purchases At least three significant differences • Value of entrepreneur’s own labor • Funds of investors: the opportunity cost of capital
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lec11 - 2010-04-01 Chapter 7: The Firm and its Goals...

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