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Chapter 06 - 06.04.2011 Chapter 6 Firms and Production Hard...

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06.04.2011 1 Chapter 6 Firms and Production Hard work never killed anybody, but why take a chance? Charlie McCarthy ECON201 - Spring 2011 6-2 Chapter 6 Outline 6.1 The Ownership and Management of Firms 6.2 Production 6.3 Short Run Production: One Variable and One Fixed Input 6.4 Long Run Production: Two Variable Inputs 6.5 Returns to Scale 6.6 Productivity and Technical Change ECON201 - Spring 2011 6-3 6.1 Ownership & Management of Firms A firm is an organization that converts inputs (labor, materials, and capital) into outputs. Firm types: 1. Private (for-profit) firms: owned by individuals or other non-governmental entities trying to earn a profit (e.g. Toyota, Walmart). Responsible for 77% of GDP. 2. Public firms: owned by governments or government agencies (e.g. Amtrak, public schools). Responsible for 11% of GDP. 3. Not-for-profit firms: owned by organizations that are neither governments nor intended to earn a profit, but rather pursue social or public interest objectives (e.g. Private universities, TEMA, Greenpeace).
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06.04.2011 2 ECON201 - Spring 2011 6-4 6.1 Ownership & Management of Firms Legal forms of organization: 1. Sole proprietorship: firms owned by a single individual who is personal liable for the firm’s debts. 72% of firms, but responsible for 4% of sales. 2. General partnership: businesses jointly owned and controlled by two or more people who are personally liable for the firm’s debts. 9% of firms, but responsible for 13% of sales. 3. Corporation: firms owned by shareholders in proportion to the number of shares or amount of stock they hold. 19% of firms, but responsible for 83% of sales. Corporation owners have limited liability; they are not personally liable for the firm’s debts even if the firm goes into bankruptcy. ECON201 - Spring 2011 6-5 6.1 What Owners Want We focus on for-profit firms in the private sector in this course. We assume these firms’ owners are driven to maximize profit. Profit is the difference between revenue (R), what it earns from selling its product, and cost (C), what it pays for labor, materials, and other inputs. where R = pq . To maximize profits, a firm must produce as efficiently as possible, where efficient production means it cannot produce its current level of output with fewer inputs.
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