M607-W10-Chapter_06

M607-W10-Chapter_06 - Chapter 6. Firms and production We...

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6-1 Chapter 6. Firms and production MSci 607: Applied economics for management (winter 2010) Instructor: Bon Koo We now shift our attention to firm’s behavior in order to derive supply curve. This chapter examines how a firm chooses its inputs to produce output efficiently, and chapter 7 considers how the firm chooses the least cost inputs among all possible efficient production processes. Then chapter 8 combines this information to determine how a firm selects the output level that maximizes profit and derives supply curve. Many approaches in the next few chapters are similar to those of the consumer theory (chapter 3 and 4), and you may want to review them before proceeding this chapter.
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6-2 1. Basic concepts of firms § Sources of production: firms, government, and nonprofit organizatio n Firms take account of the majority of production in most developed countries (U S: 84%). In many developing countries, however, the government’s share of total national production can be much higher (US: 12%, Zambia: 38%, Sudan: 40%, Algeria: 9 0%). This course of managerial economics focuses on the production by for-profit firm s . § A firm is an organization that coverts inputs (labor, capital, material Examples: automobile company, barber shop, airline, internet company, etc. Our example in the following analysis is mostly a manufacturing firm. Production Function q = f(L, K) Output q Inputs (L, K)
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6-3 1.1. Types of ownership of firms § Sole proprietorship A firm owned and run by a single individual. The owner has unlimited liability , or legal responsibility for all debts incurred by th e firm. The owner makes management decisions and receives the firm’s profit. § Partnership A firm owned and run by several people. The owners have (in most cases) unlimited liability . Partners must agree on a management structure and how to divide up the profit s. § Corporation A corporation is owned by one or more shareholders, and run by a board through a CEO. Limited liability : The personal assets of the corporate owners cannot be taken to pay firm’s debts if it goes into bankruptcy. The ownership (by shareholders) and management (by CEO) are separate. There are conflicts of interests between them, but we assume the owner is the m anager.
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6-4 1.1. Types of ownership of firms (cont’d) § Composition of ownerships in the United States (2004)
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6-5 1.2. Firm’s objective § What is a firm’s objective in its operation? Maximize profit, the size/sales of the firm, or growth rate; minimize risk, etc. § The most reasonable assumption is that a firm tries to maximize pr ofit .  (profit) = R (revenue) – C (cost) Under competition, firms will be driven out of business if it does not maximize pr ofit, because they make zero profit under competition (to be discussed later).
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This note was uploaded on 02/16/2010 for the course MTH 10 taught by Professor Gail during the Spring '10 term at 4.1.

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M607-W10-Chapter_06 - Chapter 6. Firms and production We...

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