Chapter 9 - Organizing production. After studying this chapter, you will able to: Explain what a firm is and describe the economic problems that all firms face, distinguish between technological efficiency and economic efficiency, define and explain the principal-agent problem and describe how different types of business organizations cope with this problem. | ORGANIZING PRODUCTION This lecture explains the role of firms and the problems that all firms face Objectives After studying this chapter, you will able to Explain what a firm is and describe the economic problems that all firms face Distinguish between technological efficiency and economic efficiency Define and explain the principal-agent problem and describe how different types of business organizations cope with this problem Objectives After studying this chapter, you will able to Describe and distinguish between different types of markets in which firms operate Explain why markets coordinate some economic activities and firms coordinate others The Firm and Its Economic Problem A firm is an institution that hires factors of production and organizes them to produce and sell goods and services. The Firm’s Goal A firm’s goal is to maximize profit. If the firm fails to maximize profit, it is either eliminated or bought out by other firms seeking to maximize profit. The Firm | ORGANIZING PRODUCTION This lecture explains the role of firms and the problems that all firms face Objectives After studying this chapter, you will able to Explain what a firm is and describe the economic problems that all firms face Distinguish between technological efficiency and economic efficiency Define and explain the principal-agent problem and describe how different types of business organizations cope with this problem Objectives After studying this chapter, you will able to Describe and distinguish between different types of markets in which firms operate Explain why markets coordinate some economic activities and firms coordinate others The Firm and Its Economic Problem A firm is an institution that hires factors of production and organizes them to produce and sell goods and services. The Firm’s Goal A firm’s goal is to maximize profit. If the firm fails to maximize profit, it is either eliminated or bought out by other firms seeking to maximize profit. The Firm and Its Economic Problem Measuring a Firm’s Profit Accountants measure a firm’s profit using rules laid down by the Internal Revenue Service and the Financial Accounting Standards Board. Their goal is to report profit so that the firm pays the correct amount of tax and is open and honest about its financial situation with its bank and other lenders. Economists measure profit based on an opportunity cost measure of cost. The Firm and Its Economic Problem Opportunity Cost A firm’s decisions respond to opportunity cost and economic profit. A firm’s opportunity cost of producing a good is the best, forgone alternative use of its factors of production. Opportunity cost includes both: Explicit costs Implicit costs Another day, another dollar profit—or 15 cents, after implicit costs. Emphasize the difference between accounting profit and economic profit when a firm owner is using cost information to make business decisions. Point out that only economic profit reflects the full .
