1. The Firm, Production & Cost

2. The Firm in Practice Forms of Business Organization 1. Single Proprietorship: one owner is personally responsible for what is done. 2. Ordinary Partnership: two or more joint owners, each of whom is personally responsible for all of the partnership debts. 3. Limited Partnership: partners take no part in the running of the business, and there liability is equal to the amount they actually invest in the enterprise. 4. A Joint-Stock Company : owners are not personally responsible for anything that is done in the firm. 5. A Public Corporation: set up to run a nationalized industry – Multinational Companies

3. The Financing of Firms Financial Capital or Money Capital: the money a firm raises for carrying on its business. E.g. equity funds or debt funds. Real capital (or physical capital); the firms’ physical assets such as factories.

4. Owners Capital: Stocks, shares, equity Debt: Loans, which are non-negotiable agreement to pay interest and repay the principal either at stated time or in demand. Bills, which are negotiable promises to pay a stated sum, usually within a years time. Bonds, which are negotiable promises to pay interest periodically and repay the principal at some redemption date.

5. The Firm in Economic Theory Ronald Coase viewed the firm as an institution that economizes on transaction costs. Profit Maximization The desire to maximize profits is assumed to motivate all decisions taken within a firm, and such decisions are influenced by who takes Them.

6. Production, Costs & Profits A firms profit are the difference between the revenue it received from selling its output and it’s cost of producing that output. Inputs: the material and factor services used in the production process. Outputs: the final products that emerge.

7. The Firm in Economic Theory Types of Input: 1. Intermediate products: goods produced by other firms. 2. Natural products: Land, raw material. 3. Labor: physical and mental efforts provided by people. 4. Capital: factories, machines and other man-made aids to production.

8. Evaluating Costs: Opportunity cost: the cost of using something in a particular use is the benefit forgone by (or opportunity cost of) not using it in its best alternative use. Purchased and hired inputs. Imputed costs: costs assigned to factors of production that the firm neither purchases nor hires because it already owns them. The firms own funds. Special advantages. The use of the firm’s own capital equipment (depreciation).

9. The definition of profits: The accounting definition: Includes variable as well as fixed costs. Profit and loss statement. The economists definition: (Economic Profit) Profit is the excess of revenue over all opportunity costs including those of capital. Alternative terminology: Normal Profits Super normal Profits

10. Profits & Resource Allocation Profits and losses play a crucial signaling role in the workings of a free market system.