Are easy to set up
Managerial decision making is simple
Profits are taxed only once as owner’s income
But bad decisions made by the manager are not subject to review
The owner’s entire wealth is at stake
The firm dies with the owner
The cost of capital and labour can be high
The Firm and Its Economic Problem
A firm is an institution that hires factors of production and organizes them to produce and sell goods and services.
A firm’s goal is to maximize profit.
a firm’s profit to ensure that the firm pays the correct amount of tax and to show it investors how their funds are being used.
Profit equals total revenue minus total cost.
equal to total revenue minus total cost, with total cost measured as the opportunity cost of production.
implicit rental rate of capital.
The firm’s opportunity cost of using the capital it owns
coping with the principal–agent problem
often offered to managers, gives the managers an incentive to maximize the firm’s profits, which is the goal of the owners, the principals.
tie managers’ or workers’ long- term rewards to the long-term performance of the firm. This arrangement encourages the agents work in the best long-term interests of the firm owners, the principals.
links managers’ or workers’ pay to the firm’s performance and helps align the managers’ and workers’ interests with those of the owners, the principal
The implicit rental rate of capital
the change in the market value of capital over a given period.
the return on the funds used to acquire the capital
The profit that an entrepreneur can expect to receive on average
the cost of entrepreneurship and is an opportunity cost of production
two measures of market concentration
The four-firm concentration ratio
The Herfindahl–Hirschman index (HHI)
Information and Organization
A firm organizes production by combining and coordinating productive resources using a mixture of two systems:
A firm’s opportunity cost of production
the sum of the cost of using resources
Bought in the market
Owned by the firm
Supplied by the firm's owner
The firm’s profit
limited by three features of the environment: