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Unformatted text preview: Comm 295 7.1-7.5 Organization of the Firm, Profit Maximization 7.1 OWNERSHIP AND GOVERNANCE OF FIRMS PRIVATE, PUBLIC AND NONPROFIT FIRM- Private sector/for-profit private sector : consists of firms that are owned by individuals or non-government entities, whose owners seek a profit o Eg. Coca-Cola o Contributes to most of GDP- Public sector : consists of firms and other organizations that are owned by governments or government agencies o Eg. Canada Post o Canada (13% of total GDP)- Not-for-profit sector : consists of organizations that are neither government-owned nor intended to earn a profit o Pursue social or public interest objectives o Eg. Greenpeace - Mixed enterprises/public-private partnerships : an enterprise that is partially owned by government and private interests OWNERSHIP OF FOR-PROFIT FIRMS- Sole proprietorships : firms owned by a single individual who is personally liable for firms debts- General partnerships/partnerships : businesses jointly owned and controlled by 2 or more people and are personally liable for firms debts; operate under partnership agreement - Corporations : owned by shareholders in proportion to number of shares or amount of stock they hold; elect board of directors to represent them o Limited liability : not personally liable for firms debts o Public : shares are bought and sold by general public o Private : shares cannot be bought, private equity (stock) owned by a small group of individuals o Initial public offering ( IPO ): transition from private to public, way to raise money for firm, lose ownership and control of firm - Limited partnership : owned by limited partners (whose financial liability is limited to their initial investment) and general partners (personally liable for debts- Larger firms tend to be corporations, smaller firms sole proprietorship life cycle of businesses CORPORATE GOVERNANCE- Small private sector firm with a single owner-manager: owner makes decisions- Public corporation: shareholders own corporations, elect board of directors to represent and make decisions for them (consists of managers of corporation as well as outside individuals 7.2 PROFIT MAXIMIZATION- Presume that most owners of private-sector firms want to maximize profits PROFIT = R C- Profit = revenue (price*quantity) cost- Economic cost should include opportunity cost (value of best alternative use of input firm uses) o Eg. If a firm wants to invest a certain amount of money in capital, will the returns be greater than if it just put the money in the bank (earn bank interest)? TWO STEPS TO MAXIMIZING PROFIT (q) = R(q) - C(q)- Profit, revenue and cost vary with its output- To maximize profit: o Output decision : if firm produces, what output level, q* , maximizes profits or minimizes losses?...
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- Winter '09