The Firm

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					              The Firm

               Outline
– 1. The objectives of the firm

– 2. Measuring costs of production

– 3. Rules for profit maximisation

– 2. Economies of scale & scope
       1. The objectives of the firm

 A) Profit maximisation
 B) Sales revenue maximisation

 C) Growth maximisation
        investment

        acquisitions

        mergers

 Modern      business
  – shareholders - profit maximisation
  – managers - salary, status, etc.
     The Principal-Agent Problem

 Principal= shareholder
 Agents = Board, Senior Managers

 Incentives
  – Board = threat of take-over if share
    prices fall
  – Managers
     profit-related   pay
     share  options
     fixed-term contracts
2. Measuring the costs of production

 The   production function
  – transformation of inputs into outputs
  – short-run versus long run
 The   cost structure of the firm
  – short-run versus long run
  – fixed and variable costs
  – total, average and marginal costs
  – break-even point
          Output TFC TVC        TC          Total costs for firm
           (Q)    (£) (£)       (£)
100                                                 X TC
            0    12     0        12                         TVC
            1    12    10        22
 80         2    12    16        28
            3    12    21        33
            4    12    28        40
 60         5    12    40        52
            6    12    60        72
            7    12    91       103
 40



 20

                                                            TFC
  0
      0      1     2        3         4        5    6   7         8
                                      fig
            Average and marginal costs
                              MC
                                          AC

                                           AVC
Costs (£)




                               z

                         y

                x
                                         AFC



                             (Q)
                     Outputfig
    3. Rules for profit maximisation

 Economic    profit

 Total   revenue - Total costs

 Marginal   revenue - Marginal costs
                  Finding maximum profit
                 24                                TC
                     using total curves
                 20
TR, TC, TP (£)




                 16

                                                                 TR
                 12

                  8

                  4

                  0
                        1    2    3        4   5         6   7        Quantity
                 -4

                 -8                                 TP
                                       fig
                        16   Finding the profit-maximising            MC
                             output using marginal curves
                        12
Costs and revenue (£)




                         8



                         4                    e             Profit-maximising
                                                                  output

                         0
                                  1     2     3         4      5      6         7
                                                                                    Quantity

                        -4                                                 MR
                                                  fig
   4. Economies of scale & scope

 The   long run
  – returns to scale
  – scale economies
 Internal   scale economies
  – indivisibilities
  – increased specialisation
  – economies of increased dimension
  – economies of scope
   4. Economies of scale & scope

 External   economies of scale
  – availability of finance
  – agglomeration economies
 Diseconomies    of scale
  – Information flows
  – industrial relations problems
  – Loss of flexibility
 The   shape of cost curves
        5. The external environment

 The   nature of competition
  – structure - conduct - performance

  – the competitive environment
     perfectly competitive (e.g. stock markets)
     monopolistic (e.g. restaurants)

     oligopolistic (e.g. breakfast cereal,
      newspapers…)
     monopoly

				
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posted:4/9/2010
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