Week 4B

Week 4B - COMM/FRE 295 September 30, 2010 Organization of...

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COMM/FRE 295 September 30, 2010 Organization of the Firm Sections 7.1 – 7.7 (Textbook)
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Learning Outcomes Maximizing profits and shut-down Transaction costs and incentive problems within a firm Firm ownership and governance affects who has decision making responsibility, and ultimately the firm’s profits Why the objectives of owner vs. manager may be different Make or buy decision (vertical coordination)
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Private vs. Public vs. NonProfits Private sector firms are usually dominant in most countries Public sector firms (distinct from publically traded firms) are owned and managed by government or a government agency Nonprofit firms typically have objectives other than profit maximization Government may partial own private company
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Types of Private Firms Sole Proprietorship Owner responsible for firm’s debts General Partnership Joint ownership, decision making and responsibility for firm’s debt Corporation Owned by shareholders (SH) and decisions monitored by elected board of directors No debt responsibility by SH (limited liability)
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Questions? Why do public firms have a limited liability provision? Why do some firms issue shares to the general public and in doing so “publically trade” on the stock markets such as the TSX? What does Canada have both a TSX Venture Exchange and a regular TSX exchange? What is “penny stock”; what is a microcap; how can general public invest in these?
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Maximizing Profits Firms should continue to produce output provided that the marginal revenue from the last unit exceeds the marginal cost of the last unit If marginal revenue is falling and marginal cost is rising, then at some point marginal revenue will equal marginal cost This is the point where profits are at a maximum Marginal revenue generally falls with higher Q because the price must be reduced to sell more Q Marginal cost is rising because of diminishing MP
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Shut Down Decision An important part of the profit maximizing decision is when to shut down, either temporarily or permanently A permanent shut down is warranted if resources consistently earn less than opportunity cost
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Week 4B - COMM/FRE 295 September 30, 2010 Organization of...

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