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