ECON - Chapter 10 (Organizing Production)
Corporation
A corporation is a firm owned by one or more limited liability stakeholders.
Economies of Scope
A firm experiences economies of scope when it uses specialized (and often expensive) resources to produce *a range of goods and services.* Toshiba produces the iPod hard drive as well as many different types of hard drives.Toshiba produces the iPod hard drive at a lower cost than a firm making only the iPod hard drive could achieve.
Firm
A firm is an institution that hires factors of production and organizes these factors to produce and sell goods and services.
Information Constraints
A firm is constrained by limited information about the quality and efforts of its workforce, the current and future buying plans of its customers, and the plans of its competitors.
Monopoly
A monopoly arises when there is one firm that produces a good or service that has no close substitutes and in which the firm is protected by a barrier preventing the entry of new firms.
Partnership
A partnership is a firm with two or more owners who have unlimited liability.
Proprietorship
A proprietorship is a firm with a single owner who has unlimited liability.
Technology
A technology is any method of producing a good or service.
Technology Constraint
Any increase in a firm's profit is limited by the technology available at any given time.
Depreciation
Depreciation is the fall in value of a firm's capital.
Economic Depreciation
Economic depreciation is the fall in the market value of a firm's capital over a given period. Economic depreciation equals the market price of the capital at the beginning of the period minus the market price of the capital at the end of the period.
Economic Efficiency
Economic efficiency occurs when the firm produces a given output at the least cost. ***Economic efficiency depends on the relative cost of resources.*** ***The economically efficient method is the one that uses the smaller amount of the more expensive resources and a larger amount of the less expensive resource.***
Economic Profit
Economic profit is equal to total revenue minus total cost, with the total cost measured as the opportunity cost of production.
Economies of Scale
Economies of scale exist when the cost of producing a unit of a good falls as its output increases. *Economies of scale riser from specialization and the division of labor that can be reaped more effectively by firm coordination rather than by market coordination.*
Entrepreneurship
Entrepreneurship is the factor of production that organizes a firm and makes its decisions. Entrepreneurship might be supplied by the firm's owner or by hired employees.
Forgone Interest
Forgone interest is the interest a firm could have earned had it rented out its capital instead of using it to produce goods and services.
Joint Unlimited Liability
Joint unlimited liability is liability for the full debts of a partnership.
Limited Liability
Limited liability means that a firm's owners have legal liability only for the value of their initial investment.
Monopolistic Competition
Monopolistic competition is a market structure in which a large number of firms compete by making similar but slightly different products.
Normal Profit
Normal profit is the profit that an entrepreneur earns on average. Normal profit is the cost of entrepreneurship and is just one opportunity cost of production.
Oligopoly
Oligopoly is a market structure in which a small number of firms compete. Computer software, airplane manufacture, and international air transportation are all examples of oligopolistic industries.
Perfect Competition
Perfect competition arises when there are many firms, each selling an identical product, many buyers, and no restrictions on the entry of new firms into the industry. The many firms and buyers are all well informed about the prices of the products of each firm in the industry.
Product Differentiation
Product differentiation is making a product slightly different from the product of a competing firm. What matters is that the consumer *perceives* the products to be different.
Technological Efficiency
Technological efficiency occurs when the firm produces a given output by using the least amount of inputs.
Herfindahl-Hirschman Index
The Herfindahl-Hirschman Index (HHI) is the square of the percentage market share of each firm summed over the largest firms in a market (or over all the firms if there are less than 50in the market). HHI < = Competitive HHI element of (1000, 1800) = Moderately Competitive HHI > 1800 = Uncompetitive
Principal-Agent Problem
The Principal-Agent Problem is the problem of devising compensation rules that induce an agent to act in the best interest of a principal.
Four-Firm Concentration Ratio
The four-firm concentration ratio is the percentage of the value of sales accounted for by the four largest firms in an industry. 0 = Perfect Competition. 100 = Monopoly >60 = Oligopoly <60 = Competitive Market
Opportunity Cost of Production
The opportunity cost of production is the value of the best alternative use of the resources that a firm uses in production.
Market Constraints
The quantity of goods and services each firm can sell and the price it can attain are constrained by its customers' willingness to pay and the prices and marketing efforts of other firms.
3 Firm Constraints
Three factors of a firm's environment limit the maximum economic profit it can make: 1. Technology Constraints 2. Information Constraints 3. Market Constraints
Transaction Costs
Transaction costs are the costs that arise from finding someone with whom to do business, reaching an agreement on price, and other aspects of the exchange, and of ensuring that the terms of agreement are fulfilled.
Unlimited Liability
Unlimited liability is the legal responsibility for all the debts of a firm up to an amount equal to the entire personal wealth of the owner.
Implicit Rental Rate of Capital
When a firm uses its own capital, it implicitly rents from itself. In this case, the firm's opportunity cost of using the capital it owns is called the implicit rental rate of capital.
