Economics 1: Principles of microeconomicsLecture 13Wednesday, May 23, 2012Preview:- Producerso Firm/Industryo Why the firmo Classification Ownership Market powero Assumption- ProductionTheory of a Firm:- Economics of scaleo Best to have one person to go to when searching for products- Monitors cheatingo Group project making sure everyone has an equal share in the worko Easy to monitor people when given an order- Externality issueso Easier to have all production under one umbrellaClassify Firms:Ownershipo Sole proprietor Responsible for all the activities of the firm; even personal assets are at risk 1 owner receives all the profitso Problem w/ Sole Proprietorship Ability to raise K (capital)Partnershipo 2 or more owners Split profits by some arrangement All partners are individually and collectively responsible for the activities of the firm- Up to the amount of their personal assetso Problems: If one wants to leave the partnership, he/ she needs to get the agreement of all other partners When one partner dies, partnership needs to be reformed Limit to how much K can be raisedCorporationEconomics 1: Principles of microeconomicsLecture 13Wednesday, May 23, 2012o Owners have limited variabilityo A separate, legal entity It can sue and be sued Shares are portions that people own of the company Owners are the shareholders- Rights to the firm's profits is the proportion of the profits = proportion of sharesEx. Company = 100,000 shares You own = 1,000 shares- Most you can lose is amount of $ you have invested if the company were to be suedClassify Firms by Market Power- Market power: is the ability to raise the price of the company's product, or otherwise adversely affect the terms of trade (for the customer) and not lose customerso Market structureo Usually favorable for those with a brand name Number of firms producing the same/similar product- Larger number of firms producing the same product, the less power you have Ease of entry to and exit from the industryName of the Market Structure: Perfectly competitive or Price takerCharacteristics:  Small firms producing identical products No barrier to entryMarket power: No market powerName of the Market Structure: Monopolistic competitionCharacteristics: Small firms creating slightly different products Usually no barrier to entry Examples like breakfast cereals1% of shareholdersEconomics 1: Principles of microeconomicsLecture 13Wednesday, May 23, 2012Market power: More market power than perfectly competitiveName of the Market Structure: Oligopoly Small # of firms selling products Barriers to entry Examples like gas or electronicsMarket power: Less market power than monopoly but more than a monopolistic competitionName of Market Structure: Monopoly One firm Barriers to entryMarket power: Most market powerAll 4 of these are: Price searcher firm*Do not have to be a big company to be a price