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Chapter 7.docx

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McGill University
Economics (Arts)
ECON 208
Sebastien Forte

May 14th, 2012- Chapter 7/8 Producers in the long and short run  There are 6 different types of firms: 1. Single proprietorships (no partners, no shareholders, fast decision making, full liability for that one owner) 2. Ordinary partnerships (ex. Many law firms are run this way, the partners have full liability) 3. Limited partnerships (still more than one owner, no personal liability for owners) 4. Corporations (ownership determined by who holds shares in a company) 5. State owned (“Crown”) Corporations (owned by the Queen of England- profits go to the government of Canada) 6. Non-profit organization (most of the time are incorporated)- large companies that are tax exempt, like NGOs. ex. Red Cross  Some firms are transnational corporations (TNCs), or often called multinational enterprises (MNEs), like McDonalds.  This is different from an international company, which has production processes in only one country, which sells internationally, but does not have workers in multiple countries.  Firms use financial capital- equity and debt  Equity will entitle whoever put the money in to ownership, but debt does not  With equity, you get a percentage of profits based on the percentage of shares you own  Equity is more risky because you’re entitled only to the profits, and if there are no profits you get nothing.  If a firm acquires funds from its owners in return for stocks, shares, or equity (as they are various called). Profits may be distributed as dividends, or may be retained.  A firms creditors are lenders- using debt instruments or bonds  Economists usually make two key assumptions about firms: 1. Firms are assumed to be profit-maximizers 2. Each firm is assumed to be a single, consistent, decision making unit (react to changes in the market, want to profit maximize)  Firms use 4 types of inputs for production: 1. Intermediate products (resources, ex. Rubber or metal on a car, also computers, pens, etc.) 2. Inputs provided directly by nature (ex. Cost of extracting things from the land) 3. Inputs provided directly by people, such as labour services (ex. Explicit costs are your worker’s wage, implicit could be manager’s time) 4. Inputs provided by the services of physical capital (machines)  The production function relates to inputs and outputs. It describes the technological relationship between the inputs that a firm uses and the output that is produces. q= f(LK)  Production is a flow, not a stock- it is a number of units per period of time  Economic profits include both implicit and explicit costs  Unlike the accounting definition of a profit, economic profit includes the (implicit) opportunity cost of the owner’s time and capital in the firm’s costs  Economic profits are therefore less than accounting profits (like opportunity cost, you take out the money you would have make elsewhere)  If economic profit is positive, then the owner’s capital is earning more than it could in its next best alternative use  Profit maximizing outputs:
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