ECO 401 GDB Economics Spring 2020

 

FIRM A firm is any organized form of production, in which someone or collections of individuals are involved in the production of goods and services. An organization that combines resources for the production and supply of goods and services. The firm is used by entrepreneurs to bring together otherwise unproductive resources. The key role played by a firm is the production of output using the economy's scarce resources. Firm's are the means through which society transforms less satisfying resources into more satisfying goods and services. If firms did not do this deed, then something else would. And we would probably call those something else’s firms. A firm faced with three basic questions: a. What should it produce?  b. How should it produce it and  c. How much profit/net benefit will the firm make?  

TRADITIONAL THEORY OF THE FIRM The traditional theory of the firm says that the firm’s basic goal is to maximize profits. Profit is the difference between the total revenue & total cost.  π = TR – TC TR should be greater than the TC in order to maximize the profit. Some economists say that firm do not want to maximize profit rather it wants to maximize its sales growth, its product likeliness etc. some theories says that firms basic objective is to drive its competitor out of the market. All these are rival theories. However, the traditional theory says that firm’s objective is to maximize the profit.  Types of firms:  A firm can be sole proprietorship (one-person ownership), partnership (a limited number of owners) or a limited company (a large number of changing shareholders).  

ENTREPRENEURSHIP Entrepreneurship refers to the management skills, or the personal initiative used to combine resources in productive ways. It involves taking risks. It is the managerial function that combines land, labor, and capital in a cost-effective way and uncovers new opportunities to earn profit; includes willingness to take the risks associated with a business venture.  

PRODUCTION FUNCTION A mathematical relation between the production of a good or service and the inputs used. A production function is usually expressed in this general form: Q = f(L, K), where Q = quantity of production output, L = quantity of labor input, and K = quantity of capital input. A production function is simply the relationship between inputs & outputs. Mathematically it can be written as: Q = f (K, L, N, E, T, P…) 

Where, 

Q = Output = Total product produced 

K = Capital

L = Labor 

N = Natural resources 

E = Entrepreneurship  

T = Technology 

P = Power  

COBB DOUGLAS PRODUCTION FUNCTION In economics, the Cobb-Douglas functional form of production functions is widely used to represent the relationship of an output to inputs. It was proposed by Knut Wicksell, and tested against statistical evidence by Paul Douglas and Charles Cobb in 1928. Cobb Douglas production function can be represented by the following equation, 

Q = A Kα L1 – α 

Where: 

Q = output  

L = labor input  

K = capital input  

A, α and 1 – α are constants determined by technology.  

Short run: In terms of the macroeconomic analysis of the aggregate market, a period of time in which some prices, especially wages, are rigid, inflexible, or otherwise in the process of adjusting. Short-run wage and price rigidity prevents some markets, especially resources markets and most notably labor markets, from achieving equilibrium. In terms of the microeconomic analysis of production and supply, a period of time in which at least one input in the production process is variable and one is fixed. In the microeconomic analysis, the short run is primarily used to analyze production decisions for a firm. Long run:  In terms of the macroeconomic analysis of the aggregate market, a period of time in which all prices, especially wages, are flexible, and have achieved their equilibrium levels. In terms of the microeconomic analysis of production and supply, a period of time in which all inputs in the production process is variable.  The actual length of the short run and long run can vary considerably from industry to industry. 

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