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Chapter 10 - Organizing Production.docx

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ECON 101
Corey Van De Waal

Chapter 10 Organizing Production The Firm and Its Economic Problem Firm is an institution that hires factors of production and organizes them to produce and sell goods and services The Firms Goal The goal is to maximize profit If the firm fails to reach its goal it is either eliminated or taken over by another firm that seeks to maximize profit Accounting Profit Accountants measure a firms profit to ensure that the firm pays the correct amount of tax and to show the investors how their funds are being used Profittotal revenuetotal cost Accountants use Revenue Canada rules based on standards established by the accounting profession Economic Accounting Economists measure a firms profit to help the firm to make decisions while the goal of these decisions is to maximize economic profit Economic profittotal revenuetotal cost with total cost measured as the opportunity cost of production A Firms Opportunity Cost of Production It is the value of the best alternative use of the resources that firm uses in production The opportunity cost of production is the sum of the cost of using resourcesBought in the marketOwned by the firmSupplied by the firms owner Resources Bought in the Market The opportunity cost of production includes the amount spent by the firm on resources bought in the market as the firm could have bought different resources to produce another good or service Resources Owned by the Firm The firm incurs an opportunity cost if the firm uses its capital to produce its output because the it could have sold the capital and rented capital from another firm The firm rents the capital from itself Implicit rental rate if capital is the firms opportunity cost of using the capital it owns It is made up ofEconomic depreciationthe change in the market value of capital over a given periodInterest forgonethe return on the funds used to acquire the capital Resources Supplied by the Firms Owner The owner might supply entrepreneurshipProfit is the return to entrepreneurship
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