Profit Maximization Flashcards
Competitive Market
Economists call a market where the individual producers take the prices as outside their control
Profits
Revenues minus Cost
What should we include in expression for Cost?
Be sure to include all of the factors of production used by the firm, valued at their market price
Rental Rate
the rate at which you can rent a machine for the given time period.
Proprietorship
is a firm that is owned by a single individual
Partnership
is owned by two or more individuals
Corporation
is usually owned by several individuals as well, but under the law has an existence separate from that of its owners
present value of the firm
It would be how much someone would be willing to pay to purchase the firm.
How do corporations display ownership?
The corporation issues stock certificates to represent ownership of shares in the corporation
What do the owners of a firm want?
The owners of the firm will generally want the firm to choose production plans that maximize the stock market value of the firm, since that will make the value of the shares they hold as large as possible
First best choice when firms are buying?
Managers prefer to buy goods and services on a competitive market, if they are available
Second best choice when firms are buying?
The second-best choice is dealing with an internal monopolist
Worst choice when firms are buying?
In terms of price and quality of service, is dealing with an external monopolist.
Benefit of Outsourcing
Such specialization often allows these companies to provide higher quality and less expensive services to the organizations that use their services.
Fixed factor
We refer to a factor of production that is in a fixed amount for the firm
Variable factor
A factor can be used in different amounts
What is the short run defined as?
Defined as that period of time in which there are some fixed factors—factors that can only be used in fixed amounts.
What is the long run defined as?
The firm is free to vary all of the factors of production: all factors are variable factors
What are fixed factors?
Fixed factors are factors of production that must be paid for even if the firm decides to produce zero output
What is a quasi-fixed factor ?
They are factors of production that must be used in a fixed amount, independent of the output of the firm, as long as the output is positive.
What is the difference between fixed and quasi-fixed factor?
The distinction between fixed factors and quasi-fixed factors is sometimes useful in analyzing the economic behavior of the firm.
What is the logic of profit maximization?
The logic of profit maximization implies that the supply function of a competitive firm must be an increasing function of the price of output and that each factor demand function must be a decreasing function of its price.
If the firm is maximizing profits, then ……………
If the firm is maximizing profits, then the value of the marginal product of each factor that it is free to vary must equal its factor price
What does The price of a share represent?
the present value of the stream of dividends that people expect to receive from the corporation.
What do the owners of a firm want?
The owners of the firm will generally want the firm to choose production plans that maximize the stock market value of the firm, since that will make the value of the shares they hold as large as possible
What does the total stock market value of a firm represent?
The total stock market value of a firm represents the present value of the stream of profits that the firm is expected to generate
What does the price of a share represent?
It represents the present value of the stream of dividends that people expect to receive from the corporation.
If the firm is maximizing profits, then ……………
the value of the marginal product of each factor that it is free to vary must equal its factor price
