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Unformatted text preview: 06.04.2011 1 Chapter 6 Firms and Production Hard work never killed anybody, but why take a chance? Charlie McCarthy ECO N201 - 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 ECO N201 - 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). 06.04.2011 2 ECO N201 - 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. ECO N201 - 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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This note was uploaded on 03/22/2012 for the course ECON 201 taught by Professor Çakmak during the Fall '10 term at Middle East Technical University.
- Fall '10