1、CHAPTER 6Pr oduction and Business Organization CHAPTER OVERVIEW AND TEACHING TIPSThe micro chapters in this text present the fundamentals of production theory and business organization before cost schedules are derived and market structures are explored. This ordering of topics emphasizes the links
2、between produc- tion and cost, on the one hand, and business organization and market structure, on the other. Chapter 6 is a relatively short chapter that covers only the basics of the standard theory of production and of business organization. Production functions, marginal products, average produc
3、ts, the law of diminishing returns, returns to scale, and technological change are all introduced here. So, too, are the differences between proprietorships, partnerships, and corporations.Having covered this material carefully, you will be able to demonstrate how cost curves are derived from produc
4、tion functions; that derivation is the focus of Chapter 7. Emphasize the relationships between these cost curves and both input prices and technology. This will build a strong foundation for future coverage of the supply side of product markets and the demand side of input markets. When you turn in
5、later chapters to how changes in these factors affect market equilibria in various market structures, the linkages will be there to use.LEARNING OBJECTIVES1. Define a production function and relate it to the notions of total product, marginal product, and average product.2. Explain the law of dimini
6、shing marginal returns. Define constant, increasing, and decreasing returns to scale, and relate each to the law of diminishing marginal returns.3. Compare and contrast the measures of total productivity and the productivity of a particular input. Relate both to technological change and the law of d
7、iminishing marginal returns.4. Distinguish between the short run and the long run in the context of production.5. State and explain the stylized facts that describe the growth of the aggregate U.S. economy since the turn of the century. Describe why it can be said that the experience of the United S
8、tates over the past two decades has not beenas profitable as its experience over the century taken as a whole.6. Explain the differences among the three major forms of business organization: proprietorship, partnership, andcorporation.7. Describe three reasons why firms exist in a modern economy.8.
9、Define the term unlimited liability as it applies to business organization, and explain the propensity of large busi- nesses to be incorporated.9. List the advantages and/or disadvantages of each of the three business forms.SUGGESTED ANSWERS TO QUESTIONS IN THE TEXT1. A production function defines t
10、he relationship between inputs used in the production process and output.2526 CHAPTER 6: PRODUCTION AND BUSINESS ORGANIZATION2. a.Units of Total Marginal Averagelabor input product product product0 01001 100 100412 141 70323 173 58274 200 50b. This function shows diminishing returns to labor. The ex
11、ponent would have to be greater than one to exhibit increasing returns to labor.3. Reading down the MP column: (114,000 - 86,000)/(20,000 - 10,000) = 28/10 = 2.8, 2, 1.6, 1.4. Reading down theAP column: 86,000/10,000 = 8.6, 5.7, 4.47, 3.75, 3.28.4. Graph the points with output on the vertical axis a
12、nd horsepower on the horizontal axis.5. K = your stand, grill, refrigerator, etc. L= you and your employeesM = dogs, chips, condiments, etc.In the short run, you could reduce your orders of materials, lay off some people, and shorten your hours (e.g., openat half-time). In the long run, you could ge
13、t a smaller stand and/or otherwise adjust your capital stock.6. Hiring more people would move you along a production function for a given capital stock. Buying or renting a microwave instead of a grill would change technologies and thus the production function.7. New technology: b; substitution: a,
14、c, and d (unless computers represent new technology).8. Diminishing returns can coexist with any returns-to-scale parameter. Remember that diminishing returns exist as variable inputs are added to a fixed input base in the short run. Decreasing returns to scale occur when the use of all inputs is al
15、tered.9. Marginal product decreasing means that the increase in output is always smaller for successive increments of employment. Thus, the next increase in output is always smaller than the last, which was smaller than all of the pre- vious; the next increase is thus always smaller than the average
16、 of the previous increases. Including this smaller number in the average, as a result, must reduce the average.10. a. Value to Value to TotalMember Member Others Social ValueAdam $0 $0 $0Beth $1 $1 $2Carlos $2 $2 $4Dorothy $3 $3 $6Ed $4 $4 $8Figure 6-1CHAPTER 6: PRODUCTION AND BUSINESS ORGANIZATION
17、27This shows increasing returns because when we double inputs, we more than double the “output”, or value of thenetwork.b. If there are 6 people to begin with and the membership fee is $4.50, the seventh member gains $6 in value, pays$4.50, and the existing members get $6 in value, for a total socia
18、l value of $12. If there are initially only 3 peopleon the network, the $4.50 cost of joining is greater than the $3 expected gain for the fourth person, so he or she will not join. Hence, the equilibrium tips toward universal membership with the membership benefits are just greater than the cost of
19、 joining.c. In order to encourage membership early, I might give heavy discounts to those who sign up early for my ser- vice. Perhaps the “first 5 users get a heavy discount in their fee”, followed by increasing prices for those who join later.DISCUSSION QUESTIONS1. What are the social advantages an
20、d disadvantages of the corporate form of business organization? What are some criticisms made frequently in the popular press? How valid do you think these criticisms are?2. What characterizes the industries in which “infinitesimal” businesses are found? What incentives exist for small individual pr
21、oprietorships that must encourage the continual formation of new ones?3. What factors do you think corporations consider when deciding to raise money by bonds, preferred stock, or common stock? What about persons who are going to purchase these securities? Do taxes play any role? If so, what and how
22、?4. “All large firms are bad for the economy. Firms should be small if an economy is going to be efficient.” Use actual cases to support your point of view, pro or con, on this.5. Are large corporations democratic? By what criteria would you measure “democracy?” What devices might be used to make co
23、rporations more democratic?6. What does “double taxation” mean in the context of the corporation form of business organization? Do you feel that such a tax structure is justified?7. Chronicle the path that a small business might follow in the successful expansion to incorporation. Explain why and ho
24、w each step happens and show precisely the role that operating capital plays along the way.8. Explain the relationships between a production function and its associated marginal product curve. What would be the effect of an increase in population growth on the total and marginal product curves of la
25、nd?9. What does an aggregate production function try to measure?10. Suppose that a firm employed capital and labor to produce steel and pollution. Could the pollution be considered, for purposes of analyzing the firms derived demand for pollution, to be an input? Why or why not?11. Do fixed proporti
26、ons in factor requirements (one person to one shovel) cause any difficulty for the economic theoryof production? Explain.12. Sketch typical total product curves and marginal product curves with labor as the variable input, and show what happens when the amount used of another factor, such as capital
27、, increases. Discuss and justify the changes you have shown.13. Assume that the owner of your corner grocery store tells you that she made $8000 profit last year. What does she mean by “profit?” How would you go about determining whether or not she was making “adequate” return?ESSAY QUESTIONS1. Defi
28、ne the three principal forms of business organizations. What activities are dominated by each form? Describein detail how each operates.2. “A chief function of the corporation is the widespread distribution of risk.” Evaluate this statement.3. Write an essay on the advantages and disadvantages of th
29、e corporate form of enterprise with respect to at least three criteria that you judge to be relevant.4. “Bigness is not necessarily badness.” How would you measure “bigness?” Cite one economic argument favorableto, and one unfavorable to, the existence of very large corporations.5. “Partnerships hav
30、e all the bad characteristics of proprietorships and corporations and none of the good ones.” Evaluate this statement.6. What are some of the social advantages that result from the corporate form of organization? Some disadvantages?28 CHAPTER 6: PRODUCTION AND BUSINESS ORGANIZATION7. Discuss mergers
31、, their sources, their benefits, and their costs. Who wins and who loses in a leveraged buyout?8. Contrast and compare the three forms of business organization with respect to (a) liability of owner(s), (b) access to capital, (c) control of owner(s), and (d) taxation.9. Why is a small and growing pr
32、oprietorship likely to be short of capital? List the alternative sources of funds opento it, and the advantages and disadvantages associated with each.10. Does the theory of production apply equally well to all forms of business organizations? Why or why not?11. How would you measure the marginal pr
33、oduct of a steelworker? A proprietor? A corporate executive? An economics instructor?12. Explain the relationship between the total product curve, the marginal product curve, and the average product curve. Why is marginal product zero when total product is maximized?13. Explain the difference betwee
34、n product and process innovation. How do these terms relate to the firms production technology?14. “When a firm is experiencing diminishing returns to labor, it is also experiencing decreasing returns to scale.” Trueor false? Explain your answer.15. A fish packing plant is currently employing 12 wor
35、kers, with total product equal to 150 fish cleaned per hour. A thirteenth worker when added pushes total product to 160 fish per hour. What is the relationship between total, marginal, and average product at this level of employment? Would you recommend that the firm hire the thirteenth worker? Why
36、or why not?16. A pizza restaurant would like to increase output to improve profitability. What sorts of changes might the firm make in the short run? In the long run? Explain the difference between these two economic time periods for this firm.17. What is a network market? Use an example too explain
37、 how adoption externalities make these types of markets lucrative.18. Discuss three important features of network externalities. How do these three features affect the type of market structure that we would expect to see emerging in products that generate networks? Will businesses tend to be bigor s
38、mall? What impact might that have on consumers.19. Bill Gates might argue to the antitrust authorities that his monopoly power in the area of operating systems comes from important network externalities. Carefully structure such an argument for Mr. Gates.20. Under what conditions will marginal product and average product be equal for all levels of labor?21. State the law of diminishing returns and why it is a reasonable statement of reality.
