02-Firm_and_Costs

02-Firm_and_Costs - The Firm and Costs Econ 425, Summer I...

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The Firm and Costs Econ 425, Summer I 2008
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2 The Firm b Central element of any industry. - 84% of GNP in U.S. (2002) b Organization that transforms inputs into outputs. b Do firms maximize profits? b What determines a firm’s boundaries? b Why are firms different?
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3 Do firms maximize profits? b We assume that firms maximize profits. - Profit = Revenue - Costs b However, managers’ objectives may differ from those of owners. - 20% of firms in U.S. are corporations, but represent 87% business sales (2002) b So, is profit maximization a plausible assumption? - Management incentive contracts - Reputation - Competition from rivals - Threat of takeover (mergers and acquisitions)
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4 What determines a firm’s boundaries? b Horizontal dimension largely determined by costs. b Vertical dimension results from balance between investment and performance incentives. - Specific assets and hold-up problem e.g. Fish Body and GM 1. Wooden era: GM bought car bodies from Fish Body (SR contracts) 2. Metal era: specific investments required (LR contracts) 3. GM eventually acquired Fish Body - Performance issues - Tapered integration, franchising
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5 Why are firms different? b Most U.S. firms are small. - 6 million companies, 89% employed less than 20 people (1999) b Firm performance varies a great deal. - Only 20% of variation in profit rates due to firm size and industry type
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This note was uploaded on 05/01/2011 for the course ECON 425 taught by Professor Watugala during the Spring '06 term at Texas A&M.

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02-Firm_and_Costs - The Firm and Costs Econ 425, Summer I...

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