Rationales for Establishing Firms
Input/Output Efficient scale/technology
Transactions costs Contracts

• Maximize profits
• Maximize growth
• Maximize sales
• Maximize stock price
• Maximize managers’ income/career path

• Vertical integration
• Organization of management
• Functional/divisional separation
• Compensation system

Forms of Firm Ownership
Sole proprietorship Partnership

Forms of Firm Ownership
Corporation
Companies whose capital is divided into shares that are owned by individuals who have limited responsibility for the debts of the company.

• Benefits
• Costs
• Objectives
• Conflicts
Separation of ownership from control
• Expected returns to stockholders > bondholders

These firms have remained privately owned
Ermenegildo
Zegna
$1 billion
Illy Caffe’
$450 million
Emporio
Armani
$2.3 billion
Ferrero
$10 billion

These firms have remained privately owned
$1 billion
$2.3 billion
$450 million $10 billion

Price
The Firm’s Cost Curves
0
MC
ATC
AVC
MC and AC intersect at ATC minimum
Quantity

Avg. total cost
ATC with small plant
ATC with medium plant
ATC with large plant
0 Small plant Medium plant Large plant Output/day

Average total cost
0
Economies of scale
Constant Returns to scale
Diseconomies of scale
Output per day

Strategy: Identifying Economies of Scope
Cost of producing x alone = C(x)
Cost of producing y alone = C(y)
Cost of producing 2 goods together = C(x,y)
Economies of scope are present if:
C(x,y) < C(x) + C(y)
Measure or degree of economies of scope:
[C(x) + C(y)] – C(x,y)
C(x,y)