Class Notes 4


AED Economics 200 Principles of Food and Resource Economics Winter, 2003

4. The Firm and Firm's Production and Costs - Foundation for Market Supply
The Firm - entity that employs factors of production and produces goods and/or services.
	Market Coordination vs. Managerial Coordination The Firm as a Team - benefits of working as a team are greater than benefits of working individually. Shirking - putting forth less than the agreed to effort. Monitor (manager) - rewards (motivates) workers to be more productive and seeks to minimize shirking. Functions of Management - Plan, Organize, Direct and Control. Problems Faced by Management - Production, Finance, Marketing, Labor.
Objective of Firm - maximize profit or maximize owner wealth
	Others - maximize sales (?), maximize managers' power and rewards (?). -should firm's goals be more laudable - concern for employees, improve local community, enhance the environment, etc.
Business Organization
	Type	% of U.S. Firms	% of Sales	% of U.S. Farms	% of Farm Sales
	Proprietorship Partnership Corporation	70.7 9.7 19.6	6.0 4.1 89.8	86.7 9.6 3.2	56.3 17.1 25.6
	Family Other			(2.9) (0.3)	(19.5) (6.1)
Firm Finances -
Balance Sheet
	Assets = Liabilities + Net Worth Investments = Financing sources Assets Liabilities (Debt) Net Worth (Equity)
Firm Financial Structure
	Debt - secured vs. unsecured
	Loan Note Bond Par Value or Face Value Coupon Rate Mortgage
	Equity (net worth)
	Common Stock Dividend Preferred Stock Preferred Dividend Partnership Share of Sole Proprietor equity
Firm's Costs
	Implicity costs (opportunity costs) vs. explicit costs Economic profit vs. accounting profit "Normal" economic profit = zero Accounting profit is typically > zero because opportunity cost of equity is not deducted as a cost Sunk cost
Relationship Between Production and Inputs
	Total Physical Product Marginal Physical Product Law of Diminishing Marginal Returns
Relationship Between Production and Costs
	Fixed Costs Total Average Variable Costs Total Average Total Costs Average Marginal Costs Reflection of Marginal Physical Product Law of Diminishing Marginal Returns
Long Run Costs - all costs are variable
	Long run average cost curve - lowest average cost at each output Economies of Scale Constant Returns to Scale Diseconomies of Scale
Relationship Between Production and Revenue
	Total Revenue Marginal Revenue
Profit Maximization
	Profit maximizing principle: Produce output where MR = MC
Economic Profit
	Total revenue - Total Costs Graphical representation
Return Above Variable Cost
	Total revenue - Total variable costs Graphical representation
Short Run Costs - fixed and variable costs
	- diminishing marginal returns cause MC and AVC to increase - variable costs are the important costs in decision making - to maximize profit, produce where MC = MR - economic profit - may produce when this is negative - return above variable cost - produce only when this is positive
Firm Supply Curve - MC curve that lies above AVC curve Shifts in Supply Curve
	- technology or productivity - price for inputs - taxes
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