The Firm Outline –1. The objectives of the firm –2. Measuring costs of production –3. Rules for profit maximisation –2. Economies of scale & scope
1. The objectives of the firm A) Profit maximisation B) Sales revenue maximisation C) Growth maximisation investment acquisitions mergers Modern business –shareholders - profit maximisation –managers - salary, status, etc.
The Principal-Agent Problem Principal = shareholder Agents = Board, Senior Managers Incentives –Board = threat of take-over if share prices fall –Managers profit-related pay share options fixed-term contracts
2. Measuring the costs of production The production function –transformation of inputs into outputs –short-run versus long run The cost structure of the firm –short-run versus long run –fixed and variable costs –total, average and marginal costs –break-even point
fig TC Output (Q) TFC (£) 12 TVC (£) TC (£) TVC TFC Total costs for firm X
fig Output (Q) Costs (£) AFC AVC MC x AC z y Average and marginal costs
3. Rules for profit maximisation Economic profit Total revenue - Total costs Marginal revenue - Marginal costs
fig TR, TC, T (£) TT TR TC Quantity Finding maximum profit using total curves
fig Quantity Costs and revenue (£) e Finding the profit-maximising output using marginal curves MR MC Profit-maximising output
4. Economies of scale & scope The long run –returns to scale –scale economies Internal scale economies –indivisibilities –increased specialisation –economies of increased dimension –economies of scope
4. Economies of scale & scope External economies of scale –availability of finance –agglomeration economies Diseconomies of scale –Information flows –industrial relations problems –Loss of flexibility The shape of cost curves
5. The external environment The nature of competition –structure - conduct - performance –the competitive environment perfectly competitive (e.g. stock markets) monopolistic (e.g. restaurants) oligopolistic (e.g. breakfast cereal, newspapers…) monopoly