Dr. Mohammed Alwosabi ECON 140 – Ch. 9
Notes on Chapter 9
Firms differ in the size and in the type of business they are doing but all firmsperform the same basic economic functions.
is an institution that hires factors of production and organizes them toproduce and sell goods and services.
To predict a firm's behavior, we need to know the firm's goals and theconstraints it faces.
The Firm's Main Goal
A firm’s goal is to maximize profit.
If the firm fails to maximize profits it is either eliminated or bought out by otherfirms seeking to maximize profit.
is the difference between total revenue and total cost
= TR – TC.
To maximize profit, a firm must make five basic decisions:
What goods and services to produce and in what quantities
What to produce itself and what to buy from other firms
How to produce—the production technology to use
How to organize and compensate its managers and workers
How to market and price its products
MEASURING A FIRM'S COSTS (OPPORTUNITY COST)
Accountants typically count money costs only and ignore any resource use thatdoes not result in an explicit money payment.
Thus, Accounting cost = explicit cost
When calculating costs, economists on the other hand, consider the opportunitycost of all resources used in production whether they are paid or not.