1. Chapter 19 The FIRM

2. What is a Firm? “An commercial organization that employs resources to produce goods and services.” Resources: Labor, land, capital, entrepreneurship.

3. Facts…  Most resources are owned by households. (labor, land, brains)  A great deal of production does take place at the household level. (Food prep, washing clothes, child care)  But, most production takes place through firms. Why? (Let’s look at 2 reasons why)

4. Firms are more efficient!* o Efficiency =producing more at lower cost or using less resources Brady cooks his own food, does his own laundry, and even cuts his own hair. But, he must go to a firm to get a TV and Fridge and even scissors o Increased efficiency helps to reduce “transaction costs” = the cost of bringing buyers and sellers together o Brad wants to buy bananas for.80 cents a pound so will he have to travel to Central America? – No, firms will bring the two together. Reason #1

5. Firms are more efficient!*  Reduced transaction costs means lower prices for consumers – Look at what Supermarkets provide  Lower prices mean a greater standard of living for consumers – A greater variety of goods and services, at lower prices, means a higher standard of living Reason #1

6. Grocery Store Trivia  What is the average number of items in a typical grocery store? (43,800 or 125,200)  The average sale per customer is? ($20.50 or $30.50)  Disposable income spent at grocery store (5.6% or 11.1%)  Average trips to store per week? (1.6 or 2.1)  Average profit mark up per item? (15% or 35%)

7. Who is the “King” of the firms in the US? Walmart They produce nothing. But, they are the very best at reducing transaction costs and bringing a vast array of products and services to the largest amount of people. They are the most efficient firm.

8. Firms and Team Productivity  Productivity is measured by output per unit of input. One worker can produce 3 units of output per labor hour, but 10 workers can produce 100 – Called “SYNERGY”  Team Production or Productivity allows for two advantages…* 1. Specialization of labor 2. Extensive use of capital Reason #2 Team Productivity

9. Advantage 1 - Specialization of Labor  In individual production, the individual must attempt to master every step in the production process.  In team production, each worker may be able to specialize in a specific task. Each worker may become very skilled and productive at his or her own specific task.  Assembly line…Japanese team concepts  Adam Smith recognized “specialization” as a key to economic growth Team Productivity

10. Advantage 2 - Extensive use of Capital  Team production may allow for the use of large amounts of highly specialized and highly productive capital. Capital = Produced goods that are used in the production of other goods. An automotive assembly plant Caterers that cook for 200 people Orange County Choppers Large Hospitals vs. doctor’s offices Team Productivity

11. No “I” in TEAM  The production of the individual is important in team production  “Shirking” is avoiding the performance of an obligation  What are ways to shirk on the Job?  Many firms employ managers (production and operations managers) to oversee the efficiency and production of individuals  Profit sharing is used to combat shirking Team Productivity

12. Electricity Exercise  The whole depends on the parts  When the goal is maximum efficiency, any breakdown effects positive outcomes  Blame never changes the past, but explains how to improve the future

13. The Principal-Agent Problem  An agent is a person who agrees to act for the benefit of another, the principal.  An agent may pursue self-interest instead of the principal’s interest. It is the nature of people to be self-seeking  Shirking is an example of the principal- agent problem.

14. Two General Types of Firms  Business Firms – They are owned by individuals; proprietors, partners, or stockholders. Profits of the firm are given to these “Residual Claimants”  Not-for-profit Firms – Have no Residual Claimants. They exist to perform a service or meet a need of society. Use a mix of volunteers and hired staff  http://www.teamusa.org/Careers http://www.teamusa.org/Careers

15. The Chief Goals of Business Firms*  To maximize shareholder and stakeholder profits  To maximize profits…The firm will use its resources to produce in response to consumer demand  To maximize profits…The firm will use its resources as efficiently as possible

16. Should the Goal of American Business Firms always be to Maximize Profits?  Arguments for YES…  Arguments for No… Question How does profit maximization and social responsibility work together?

17. Forms of Business Firms  Sole Proprietorship – a firm owned by one individual – 72% of all firms, 4% of all sales  Partnership – a firm owned and operated by two or more co-owners -10% of all firms, 14% of all sales  Corporation – an organization owned by stockholders that is considered a legal person, separate from its owners – 18% of all firms, 82% of all sales Next Subject: Forms

18. Sole Proprietorship A firm owned and operated by one individual  Give me an example of a proprietorship here in York.  Most common type of business (72%)  Relatively easy to form and dissolve due to favorable laws and gov. support.

19. Advantages and Disadvantages of Proprietorships Advantages  Very simple to start (usually a simple permit or license)  Owner maintains complete control  Owner keeps all potential profits  No special taxes

20. Proprietorships Disadvantages  The proprietor has “unlimited liability”  His/her personal assets are subject to business debts  Difficult to raise large amounts of financial capital – usually your own $  Proprietorships end with the death of the proprietor

21. Corporations  An organization owned by stockholders that is considered a legal person, separate from its owners  When a state grants a firm a corporate charter…that firm can own property, enter into contracts, commit crimes, and be personally liable for its debts

22. Partnerships Give me an example of a partnership here in York?  Advantages – Specialization of different partners (law firms, counseling centers, doctors)  Shared Risk  Relatively easy to form and dissolve  Disadvantages – Partners liable for debt of whole company. Frozen Assets.  Lack of continuity of Firm

23. Advantages of Corporations  Limited liability of stockholders – only for the amount of the stock  Fairly easy to raise large amounts of financial capital  Corporations do not end with the death of a stockholder (Continuity)

24. Disadvantages of a Corporation  Relatively complex and expensive to organize, to operate, and to dissolve.  Corporations are due to double taxation – net income of firm and income tax of stockholders – 35% corporate tax rate  There is a separation between ownership and control

25. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 4 | Slide 25 Advantages and Disadvantages of a Sole Proprietorship, Partnership, and Corporation

26. How do Proprietorship and Partnership firms raise financial capital?  Self-financing – The owners contribute personal assets to the firm  Borrowing from financial institutions – taking out a loan from a local bank, investment bank, etc…

27. Corporations have more options…  Issuing additional shares of stock – giving the opportunity for more owners  Selling Bonds –A debt obligation sold in open market operations (loans from bond holders)

28. Balance Sheet of a Firm  A balance sheet is a financial report that shows the firm’s assets minus its liabilities. The result is the firm’s NET WORTH Assets150 million Liabilities130 million Net Worth 20 million