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The Firm and Its Goals

Learning Objectives. Understand the reasons for existence of firms and meaning of transaction costsExplain economic goals and optimal decision makingDescribe meaning of principal-agent" problemDistinguish between profit maximization" and shareholder wealth maximization"Demonstrate usefulness

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The Firm and Its Goals

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    2. The Firm and Its Goals The Firm Economic Goal of the Firm Goals Other Than Profit Do Companies Maximize Profits? Maximizing the Wealth of Stockholders Economic Profits

    3. Learning Objectives Understand the reasons for existence of firms and meaning of transaction costs Explain economic goals and optimal decision making Describe meaning of “principal-agent” problem Distinguish between “profit maximization” and “shareholder wealth maximization” Demonstrate usefulness of Market Value Added and Economic Value Added

    4. The Firm A firm is a collection of resources that is transformed into products demanded by consumers. What is wrong with this definition? Profit is the difference between revenue received and costs incurred (explicit and implicit).

    5. The Firm Transaction costs are incurred when entering into a contract. Types of transaction costs Investigation Negotiation Enforcing contract and coordinating transactions Influences Uncertainty Frequency of recurrence Asset specificity

    6. Internet What is the effect on transaction costs? Bigger or smaller firms?

    7. The Firm Limits to Firm Size tradeoff between external transactions and the cost of internal operations Company chooses to allocate resources so total cost is minimum Outsourcing of peripheral, non-core activities

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