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1.The Firm
A technical
unit engaged in the production of one or a group of related commodities. In
theory, perceived as a single product firm with the entrepreneur serving as a
surrogate for a decision-making hierarchy and involving the study mainly of
external behavior and only ‘cost analysis’ of production decisions,
i.e. not business management.
2. Production
Creation of goods and/or services, which, directly or indirectly, satisfy human
wants, needs and desires. Through production the firm
puts utility into such goods & services generating supply which is the obverse of consumer demand
which involves the extraction of utility.
In theory, production is viewed as the only function of the firm.
Through supplying commodities demanded by consumers, the firm strives to maximize
profits.
3. Input/Factors of Production
Any good or service which
contributes to the production of output. Factors include:
capital (K; labour (L); natural resources (N); and entrepreneurship. This last factor
is poorly defined and resists empirical measurement. For those
interested in a fuller description of these factors of production,
please see
Observation #6: Capital. Labour & Natural Resources.
4. Cost
(MKM
C13/276; 257-259;
282-284;
262-264)
Cost is the price of factors of production used in producing output. Along with
Price
and Quantity of final output, Cost is a key economic decision-making factor.
5. Output
Output is the result of transforming inputs into goods or services which satisfy,
directly or indirectly, human wants, needs and desires. Output
increases until the additional or marginal revenue earned for the last unit sold
equals its marginal cost.
6. Profits
(MKM
C13/276; 258-259;
284-285;
264)
Profit is the residual
of Revenue (Price times
Quantity sold)
earned by the entrepreneur after all other factors of production have been
paid. It is
compensation for uncertainty and entrepreneurship ideally earning normal profits
(the opportunity costs of entrepreneurship) but sometimes earning monopoly, excess
or economic profits. In theory,
profit is the raison d’etre of the firm which can be gained, however, only by
satisfying consumer wants, needs and desires.
The distinction
between 'normal' profits
- the opportunity cost of entrepreneurship - and 'economic' profits,
i.e., in excess of normal profits, need be remembered.
There are thus 'good' and 'bad' profits in Economics
(MKM
Figure 13.1).
7. Ownership
vs.
Control
A firm may be owned and controlled by the same individual or group, or these two
functions may be separated. In
theory, it is assumed there is no significant effect of their separation and
profit maximization remains the functional objective of the firm.
8. Diversification
The distribution of productive investment across geographic space, or
multiplying the number and types of outputs in order to insure profit stability
by offsetting gains and losses. Geographic diversification is not formally considered except as
additions to factor cost. Similarly
multiple outputs not considered in the Standard Model.
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