The Firm

1
The Firm

• Chapter Six

2
Three Legal Forms

• Sole proprietorship
• Partnership
• Corporation

3
Financing Methods

• Retained earnings
• Borrow
• Bonds
• Bank loans
• Issue shares of stock

4
Long vs. Short Run

• Long run
• Variable
• Short run
• Fixed

5
Marginal Product of Labor
6
Marginal Product of Labor
10
9
8
7
Quantity
6
5
4
3
2
Marginal Product
1
0
Labor
3
2
1
4
5
6
7
-1
7
Law of Diminishing Returns

• Labor
• Other inputs

8
Profit

• Normal profit
• Economic profit

• Explicit costs
• Implicit costs

Profit Total Revenue - Total Cost
Economic Profit Total Revenue - Explicit Costs
- Normal Profit
9
Short-Run Costs

• Fixed costs
• Variable costs

Total Cost Total Fixed Cost Total Variable
Cost
10
Marginal Cost

• Definition

Marginal Cost ? total cost/ ? quantity
? total variable cost/
? quantity
11
Costs
12
Marginal Revenue

• Definition

Marginal Revenue ? total revenue/ ? quantity

13
Profit Maximization
MR MC
14
Price Taker

• Definition

15
Profit-Maximizing Output
Marginal Cost
Dollars
Average Cost
Price
Marginal Revenue
Q
Quantity
16
Price Taker Output
Dollars
Marginal Cost
Higher Price
Lower Price
Higher Quantity
Quantity
Lower Quantity
17
Price Searcher

• Definition

18
Profit-Maximizing Output
Dollars
Price
Quantity
Marginal Revenue
Q
19
Price Searcher Maximum Profit
20
Scale of Production
Dollars
Long-Run Average Cost
Economies of Scale
Diseconomies of Scale
Constant Returns to Scale
Optimal Plant Size
Quantity
21
The Total Product of Labor
Total Product
Quantity of Output
Labor
Increasing Marginal Product
Decreasing Marginal Product
Negative Marginal Product
22
Total Labor Requirements
Labor Requirements
Labor
Quantity of Output
23
Cost Curves
Total Cost
Total Variable Cost
Dollars
Total Fixed Cost
Increasing marginal cost
Decreasing marginal cost
Quantity
24
Cost Curves
Marginal Cost
Dollars
Average Cost
Average Variable Cost
Quantity
25
Cost in Detail
26
Profit-Making Firm
Marginal Cost
Average Cost
Price
Profit
Dollars
Output
Quantity
27
Firm With a Loss
Marginal Cost
Dollars
Average Cost
Average Variable Cost
Loss
Price
Output
Quantity
28
Total Profit
Dollars
Marginal Cost
Average Cost
P
Profit
AC
Demand
Q
Quantity
Marginal Revenue