The Firm and Economic Organization

• A firm is an organization which buys factors of production and puts them to use producing goods or services.

• A firm can be a family farm, a doctor’s office, a hot dog stand or General Motors.

• In modern capitalism, production takes place within firms.

TYPES OF FIRMS

Three types of firms– Sole Proprietorship

• Most numerous

– Partnership

– Corporation• Most output

Sole proprietorship

• One owner. • No formal process to establish a sole

proprietorship. • Unlimited liability: All the assets of the

owner, including a home or personal stereo set can be claimed to pay off debts incurred in operating the firm.

• Profits are taxed as the personal income of the owner.

Partnership

• more than one owner.

• Can be established informally. Wise partners enter into a legal agreement

• Unlimited liability for each owner.

• Profits are taxed as the personal income of the owner.

Corporation

• The firm is considered a legal person that can be sued in court and taxed.

• one or more owners who are called stock or share holders.

• Must be established through a legal process. • The profits of the corporation may be paid out in

dividends or may be reinvested in the firm as retained earnings.

• Limited liability: The most the owners can lose is the funds they invested in purchasing the shares of the firm.

• Profits are taxed first as the income of the corporation. When they are paid out as dividends on the shares of the company they are taxed again as the personal income of the owners.

MARKET STRUCTURE

• Economists define four types of markets:– Perfect competition– Monopolistic competition– Oligopoly– Monopoly

Perfect competition

• Many firms and many buyers producing identical products.

• Firms can easily enter and exit the market.

• All participants are well informed about prices and other market conditions.

• Beef farmers, blueberry farmers and the stock market are perfectly competitive

Monopolistic competition

• Many firms and many buyers producing slightly different products. (The only difference may be location.) Products are differentiated.

• Firms can easily enter and exit the market. • All participants are well informed about prices

and other market conditions. • Fast food restaurants are monopolistically

competitive.

Oligopoly

• A small number of firms produce either similar or different products.

• Pepsi and Coke are oligopolies.

Monopoly

• One firm produces a good with no close substitutes.

• Entry to the industry is not possible. • Microsoft has a near monopoly of the

operating systems of PCs. N.S. power has a monopoly on the production of electricity in Nova Scotia. The NSLC has a monopoly on the sale of liquor in Nova Scotia.

Market Structure

• Most firms operate in industries with market conditions some what less perfect than perfect competition.

• Many saw mills produce identical products for many purchasers, but they all differ in location.

• Many ‘monopolized’ products have relatively close substitutes.

• The Post office has a monopoly on the delivery of ordinary letters, but they compete with the telephone, with email and with courier services. Electricity competes with fuel oil in home heating.