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Chapter 10

Economics 1021A/B Chapter Notes - Chapter 10: Sole Proprietorship, Economic Efficiency, Opportunity Cost


Department
Economics
Course Code
ECON 1021A/B
Professor
Bruce Hammond
Chapter
10

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Chapter 10
Organizing Production
The Firm and Its Economic Problem
A firm is an institution that hires factors of production and organizes those factors to produce
and sell goods and services.
The firm’s goal is to maximize profit.
The opportunity cost of any action is the highest-valued alternative forgone.
A firm’s opportunity cost of production is the sum of the cost of using resources:
o Bought in the market
o Owned by the firm
o Supplied by the firm’s owner
The firm’s opportunity cost of using the capital it owns is called the implicit rental rate of
capital.
The implicit rental rate of capital is made up of economic depreciation and forgone interest.
Economic depreciation is the change in the market value of capital over a given period.
The return to entrepreneurship is profit, and the return that an entrepreneur can expect to
receive on the average is called normal profit.
A firm’s economic profit is equal to its total revenue minus its opportunity cost.
The firm’s opportunity cost includes normal profit.
Study Table 10.1 on p. 229 of your text, which summarizes economic accounting concepts.
The features of the environment that limit the maximum profit a firm can make are technology
constraints, information constraints, and market constraints.
A technology is any method of producing a good or service.
Technological and Economic Efficiency
Technological efficiency occurs when the firm produces a given output by using the least
amount of inputs.
Economic efficiency occurs when the firm produces a given output at the least cost.
Study the examples on pp. 231-232 of your textbook.
Information and Organization
Firms use a mixture of two systems to organize production:
o Command systems
o Incentive systems
A command system is a method of organizing production that uses a managerial hierarchy.
Commands pass downward through the managerial hierarchy, and information passes upward.
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