The Firm and Costs
The Firm and Costs
Forms of Ownership.
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Sole proprietors and partners are personally liable for the debts of
their business. All the owners’ assets, not just those invested in the
business, are at risk. For example, a partner bears full personal liability
for the debts of a failed business if the other partners have no assets,
even if the business fails through no fault of the partner with the
assets. Partnerships have a second problem as well. If one member of a
partnership leaves, the entire partnership is automatically dissolved. To
continue, the business must form a new partnership
Shareholders (also called equity owners because they own rights to the
capital or equity of the firm) are entitled to receive dividend payments,
which come out of the corporation’s profits
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When control is separated from ownership, managers may not attempt
to maximize profits and may pursue other objectives, like maximizing
their own incomes, not working hard, and having plush offices.
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Mergers That Increase Efficiency. Acquisitions and other mergers that
increase efficiency are desirable for society. There are a number of
reasons why takeovers of existing firms may promote efficiency,
including increasing scale to an optimal level, creating synergies, and
improving management
ECONOMIES OF SCALE
A firm’s average costs may remain constant, rise, or fall as its output
expands. If average cost falls as output increases, the firm is said
to have economies of scale (or increasing returns to scale); if
average costs do not vary with output, it has constant returns to
scale; and if average cost rises with output, the firm is said to have
diseconomies of scale (or decreasing returns to scale).
MULTIPRODUCT FIRMS
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Most firms do not produce a single product; it is typical for a firm to
make several different, perhaps related, products. A firm that produces
many different products is called a multiproduct firm
MARKET STRUCURES
COMPETITION
Perfect competition
Even though perfect competition is rarely, if ever, encountered in the
real world, we study the perfect competition model because it provides
an ideal against which to compare other models and markets.
Assumptions
We define perfect competition as a market outcome in which all firms
produce homogeneous, perfectly divisible output and face no barriers
to entry or exit; producers and consumers have full information, incur
no transaction costs, and are price takers: and there are no
externalities. That is, the main assumptions of perfect competition are:
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■ Price Taking. Buyers and sellers cannot individually influence the
price at which the product can be purchased or sold. Price is
determined by the market. So each buyer and seller takes the price as
given.
No Transaction Costs. Neither buyers nor sellers incur costs or fees to
participate in the market.
No Externalities. Each firm bears the full costs of its production
process. That is, the firm does not impose externalities—
uncompensated costs—on others. For example, pollution produced by
a firm is an externality because the firm does not recompense the
victims.
Free Entry and Exit. Firms can enter and exit the market quickly at any
time without having to incur special expense. That is, firms do not face
barriers to entry or exit.
Perfect Divisibility of Output. Firms can produce and consumers can
buy a small fraction of a unit of output. As a result, the amount of
output demanded or supplied varies continuously with price. This
technical assumption avoids problems caused by large discrete changes
in either supply or demand in response to small price changes.
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In contrast to a price-taking competitive firm, a monopoly knows that it
can set its own price and that the price chosen affects the quantity it
sells. Whenever a firm can influence the price it receives for its product,
the firm is said to have monopoly power or market power. The terms
monopoly power and market power typically are used interchangeably
to mean die ability to profitably set price above competitive levels
(marginal cost)
CREATING AND MAINTAINING A MONOPOLY
There are several ways in which a firm may become and remain a
monopoly. One possibility is that the firm takes a strategic action that
prevents entry by other firms. Another possibility is that all the firms
merge (combine into a single firm) or act in concert as a monopoly
would.
MONOPSONY
A single buyer in a market is called a monopsony. A monopsony’s
decision on how much to buy affects the price it must pay (just as a
monopoly’s choice of output affects the price it receives). The
monopsony decides how much to purchase by; ‘noosing a price-
quantity pair on the market supply curve. Monopsony is the flip? Ide of
monopoly. Both a monopoly and a monopsony recognize that their
actions affect the market price.
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