Firms

business firm

an entity that employs resources, or factors of production, to produce goods and services to be sold to consumers, other firms, or government

invisible hand

the market guides and coordinates individuals’ actions

visible hand

a manager

market coordination

the process in which individuals perform tasks, such as producing certain quantities of goods, based on changes in market forces such as supply, demand, and price

managerial coordination

process in which managers direct employees to perform certain tasks

Alchian and Demsetz answer

firms are formed when benefits can be obtained from individuals working as a team

sum of team production > sum of individual production

shirking

occurs when workers put forth less than the agreed-to-effort

monitor

reduces the amount of shirking by firing shirkers and rewarding productive members

residual claimant

a person who shares in the profits of a business firm

1. buying side (demand)

2. selling side (supply)

2 sides to every market

1. revenue side

2. cost side

2 sides to every business firm

Profit = Total revenue - Total cost

formula for profit

Total Revenue = Price x Quantity

formula for total revenue

explicit cost

cost incurred when an actual (monetary) payment is made, such as payment for resources bought and rented

implicit cost

cost that represents the value of resources used in production for which no actual (monetary) payment is made, such as opportunity costs

accounting profit

difference between total revenue and explicit costs

economic profit

difference between total revenue and total cost (both explicit and implicit)

normal profit

a firm that makes zero economic profit is said to be earning