Other types of enterprises

The proprietorship, the partnership, and the corporation are not the only possible types of firms in the economy.

Labor-managed firm is a firm that is owned and thus managed by the employees of the firm, who have the right to claim residuals.

Nonprofit firm is a firm in which the costs of production and revenues must be equal and which does not have a residual claimant.

Publicly owned firm is a firm owned and operated by government.

3. Functions of business firms

1. Production of goods and services to be sold.

2. Assignment of tasks to workers versus contracting with other firms: determining the degree of vertical integration.

There are a number of reasons why a firm may choose to integrate operations that could be performed by or purchased from other firms:

1. To ensure a reliable flow of materials and services as inputs.

2. To put rival firms at a disadvantage by controlling a key input.

3. To improve communication in ways that might reduce costs or improve the quality of output.

4. To adapt more easily to changing technology.

4. Management

A fundamental principle involved in the operations of many firms in team production.

Team production is an economic activity in which workers must cooperate, as team members, to accomplish a task.

The classic example of team production is the assembly line invented by Henry Ford.

Personnel management is the process by which managers monitor worker performance and provide rewards for workers who perform efficiently. Good managers choose productive workers and motivate them to perform up to their potential. Good personnel management procedures ensure the maximum possible output per worker over any given period.

A multiproduct firm is one that produces several different items for sale in markets. An important problem faced by the management of a multiproduct firm is the location of scarce productive resources among the various product lines.

Shirking is a situation in which sometimes rational behavior of members of a team production process in which the individual exerts less than the normal productive effort.

Lecture 6. Production, cost and profit

1. Production relationships.

2. The law of diminishing marginal returns.

3. Variable costs, fixed costs, and total costs.

4. Measuring cost and profit.

5. Normal profit and economic profit.

1. Production relationships

Production is the process of using the services of labor and equipment together with other inputs to make goods and services available.

Inputs are the labor, capital, land, natural resources, and entrepreneurship that are combined to produce any output.

The relationship between any combination of input services and the maximum output obtainable from that combination is described by a production function.

Period of Production

Short run is a period of production during which some inputs cannot be varied.

A variable input is one whose quantity can be changed.

A fixed input is one whose quantity cannot be changed over the short run.

Long run is periods of production long enough that managers have time vary all the inputs used to produce a good. In the long run there are no fixed inputs.