firm

Examples of firm in the following topics:

• Duopoly Example

  • Firms have market power, and each firm's output decision affects the good's price;
  • Firm B will be conducting similar calculations with respect to Firm A at the same time.
  • If Firm B is setting the price above marginal cost but below monopoly price, then Firm A will set the price just below that of Firm B.
  • When Firm 2 prices above MC but below monopoly prices, Firm 1 prices just below Firm 2.
  • When Firm 2 prices above monopoly price (PM), Firm 1 prices at monopoly level (P1=PM).

• Introducing the Firm

  • "Firm" is simply another word for company or business.
  • Not all markets and societies involve firms.
  • Firms also allow economic growth, not only for the firm but for the broader society in which it resides.
  • Organization into a firm can considerably reduce these costs.
  • Explain the importance of private companies and firms in the economy

• Collusion and Competition

  • Oligopoly is a market structure in which there are a few firms producing a product.
  • Second, coordination among firms is difficult, and becomes more so the greater the number of firms involved.
  • A firm may agree to collude and then break the agreement, undercutting the profits of the firms still holding to the agreement.
  • Finally, a firm may be discouraged from collusion if it does not perceive itself to be able to effectively punish firms that may break the agreement.
  • Price leadership, which is also sometimes called parallel pricing, occurs when the dominant competitor publishes its price ahead of other firms in the market, and the other firms then match the announced price.

• Shut Down Case

  • By stopping production the firm only loses the fixed costs .
  • The goal of a firm is to maximize profits and minimize losses.
  • If the revenue the firm is making is greater than the variable cost (R>VC) then the firm is covering it's variable costs and there is additional revenue to partially or entirely cover the fixed costs.
  • It does not automatically mean that a firm is going out of business.
  • A firm cannot incur losses indefinitely which impacts long run decisions.

• The Firm in Pure Competition

  • A purely competitive market is characterized by a large number of relatively small firms.
  • No single firm can influence the market price and are considered price takers.
  • Panel B.VII.2 represents a single firm in the market.
  • Since there are a a large number of firms in the market with identical or homogeneous products, buyers have no preference for any one firm's product.
  • The demand faced by a single firm is perfectly elastic at the market price.

• MVA and EVA

  • ., and EVA is an estimate of a firm's economic profit.
  • If the MVA is positive, the firm has added value.
  • If it is negative, the firm has deminished value.
  • where: MVA is market value added, V is the market value of the firm, including the value of the firm's equity and debt, and K is the capital invested in the firm.
  • Quite simply, EVA is the profit earned by the firm, less the cost of financing the firm's capital.

• Signaling

  • Dividend decisions are frequently seen by investors as revealing information about a firm's prospects; therefore firms are cautious with these decisions.
  • A dividend decision may have an information signalling effect that firms will consider in formulating their policy.
  • An information asymmetry exists if firm managers know more about the firm and its future prospects than the investors.
  • When investors have incomplete information about the firm (perhaps due to opaque accounting practices) they will look for other information in actions like the firm's dividend policy.
  • A company's dividend decision may signal what management believes is the future prospects of the firm and its stock price.

• The Demand Curve in Perfect Competition

  • A perfectly competitive firm faces a demand curve is a horizontal line equal to the equilibrium price of the entire market.
  • Individual firms are forced to charge the equilibrium price of the market or consumers will purchase the product from the numerous other firms in the market charging a lower price (keep in mind the key conditions of perfect competition).
  • The demand curve for an individual firm is thus equal to the equilibrium price of the market .
  • Instead, assuming that the firm is a profit-maximizer, it will sell its goods at the market price.
  • The demand curve for an individual firm is equal to the equilibrium price of the market.

• Short Run Firm Production Decision

  • Fixed costs have no impact on a firm's short run decisions.
  • In the short run, a firm that is maximizing its profits will:
  • The goal of a firm is to maximize profits by minimizing losses.
  • However, a firm cannot incur losses indefinitely.
  • If market conditions do not improve a firm can exit the market.

• Market Power

  • Market power is a measure of the economic strength of a firm.
  • A firm is said to have significant market power when price exceeds marginal cost and long run average cost, so the firm makes economic profits.
  • Such firms are often referred to as "price makers. " In contrast, firms with limited to no market power are referred to as "price takers. "
  • The numbers and size of firms determine the extent that firms can withstand pressures and threats to change prices or product flows.
  • A firm's market power influences its behavior.