1. The Firm  Outline –1. The objectives of the firm –2. Measuring costs of production –3. Rules for profit maximisation –2. Economies of scale & scope

2. 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.

3. 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

4. 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

5. fig TC Output (Q) 0 1 2 3 4 5 6 7 TFC (£) 12 TVC (£) 0 10 16 21 28 40 60 91 TC (£) 12 22 28 33 40 52 72 103 TVC TFC Total costs for firm X

6. fig Output (Q) Costs (£) AFC AVC MC x AC z y Average and marginal costs

7. 3. Rules for profit maximisation  Economic profit  Total revenue - Total costs  Marginal revenue - Marginal costs

8. fig TR, TC, T  (£) TT TR TC Quantity Finding maximum profit using total curves

9. fig Quantity Costs and revenue (£) e Finding the profit-maximising output using marginal curves MR MC Profit-maximising output

10. 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

11. 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

12. 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