ORGANIZING PRODUCTION ( The Firm and Its Economic Problem (A Firm’s…
The Firm and Its Economic Problem
firm is an insti- tution that hires factors of production and organizes those factors to produce and sell goods and services.
A Firm’s Opportunity Cost of Production
Bought in the market
Owned by the firm
Supplied by the firm’s owner
Resources Bought in the Market
Resources Owned by the Firm
Resources Supplied by the Firm’s Owner
Coping with the Principal–Agent Problem
Types of Business Organization
A sole proprietorship is a firm with a single owner—a proprietor—who has unlimited liability.
A partnership is a firm with two or more owners who have unlimited liability.
A corporation is a firm owned by one or more limited liability shareholders.
Pros and Cons of Different Types of Firms
Markets and the Competitive Environment
The Firm’s Constraints
Limitations of a Concentration Measure
The geographical scope of the market
Barriers to entry and firm turnover
The correspondence between a market and an industry
Information and Organization
A command system is a method of organizing produc- tion that uses a managerial hierarchy. Commands pass downward through the hierarchy, and informa- tion passes upward.
An incentive system is a method of organizing produc- tion that uses a market-like mechanism inside the firm.
The Principal–Agent Problem
The principal–agent problem is the problem of devis- ing compensation rules that induce an agent to act in the best interest of a principal.
Measures of Concentration
The 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.
The Herfindahl-Hirschman Index
The Herfindahl- Hirschman Index—also called the HHI—is the square of the percentage market share of each firm summed over the largest 50 firms (or summed over all the firms if there are fewer than 50) in a market.