Chapter 7

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University of Toronto Scarborough
Economics for Management Studies
Gordon Cleveland

Chapter 7: Producers in the Short Run 7.1 WHAT ARE FIRMS Financing of Firms The money a firm raises for carrying on its business is sometimes called its financial capital. The basic types of financial capital used by firms are equity and debt. Equity is the funds provided by the owners of the firm. Debt is the funds borrowed from creditors outside the firm. Goals of Firms All firms are assumed to be profit-maximizers, seeking to make as much profit for their owners as possible. Each firm is assumed to be a single, consistent decision-making unit. The desire to maximize profits is assumed to motivate all decisions made within a firm, and such decisions are assumed to be unaffected by the peculiarities of the persons making the decisions and by the organizational structure in which they work. 7.2 PRODUCTION, COSTS, AND PROFITS Production Factors of production: land, labour and capital. The production function describes the technological relationship between inputs that a firm uses and the output that it produces. Costs and Profits Economic Versus Accounting Profits
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