Alaleh Mani

1. Organizing
Production
Reading 16
Book2
Level 1

2. The Entrepreneur’s main Goal is to
Maximize Economic Profit
Total
Receipt from Sales (+) Revenue
Factor of production (-) Operating Revenue
Utility Consumption (-) Explicit Cost or Expense (-)
Wage Payment (-) Opportunity Cost of using resource
Annual Surplus
cost
Economic
Cost
Total
Lease Payment (-)
Return
Interest Payment (-)
Economic Depreciation (-)FASB Implicit rental rate
Interest forgone(-) Firm’s Capital in use
Opportunity Cost
Firm’s time or financial resources (-) Implicit Cost (-)
Wage forgone (-) Owner’s Resource Cost
Normal profit (-)
Exclude from opportunity
cost
Economic Profit= Total Revenue-Total Cost=Residual
Income
Return=Economic Profit-Normal Profit

3. Exam typical Question
 Which cost is not opportunity cost
 Which business survive due to its return or
accounting cost
 What is economic cost
 What is normal benefit

4. Constrain Definition aim Reason of Example
constrain
Firm Method of
Technology Constrain less Profit
production,
Use in
resources
Expensive
Not
Shopping
mall is a
machine and available new
design, decrease technolo
workplace cost gy in
layout, retail
firm organization system
Information To answer the Make Costly Quality of
question of decision for Time workforc
what, when and now and consuming e is an
where, who, present to search importan
how t data
Market Customer’s Marketing Costly Willingnes
willingness to and selling Advertisem s of
pay and ents People
competition act

5. Technological and Economic
efficiency Production Efficiency (CFA 2009)
4 variable are important:
1. Number of inputs as Human Capital (Labor)
2. Number of inputs as Physical Capital (Equipment)
3. Value or Cost of Physical Capital
4. Value or Cost of Human Capital
Production Efficiency
For a given number of product:
If firm use least amount of inputs  Technological Efficiency
occurs
If firm produce at the least Cost Economic Efficiency
occurs(2009)
Technological Efficiency depends on feasibility (Schweser 2010)
Economic Efficiency depends on Cost of resources

6. Information and Organization
 More than technology and Capital there
System areMethod three system in organizing the
other Management disadvantag Example
production: role es
Command Manageri Well informed Incomplete Military
al Make decision Information CEO (chief executive
Hierarchy Command (cfa Costly officer)
in layers 2008) monitoring
sys
Incentive Market Use Costly Share for CEO
Bonus for Factory
Like Compensation relative to floor worker
Mechanis scheme to monitoring Percentage for sale
m induce workers system representative
Combine Both Both - Most firms

7. Coping With agent Principal
Problem
In different organization
 Agent pursue her own goal (On the
job leisure)and impose cost on
principal
 Compensate rule to induce agent
Coping way Definition Example
Ownershipto act in the best interest (Improving for
Assigning part Part-ownership
ownership employee
performance ) of agent
Incentive pay Pay related to Promoting employee
performance For good performance
Long term contracts Long term fortune of CEO multiyear contract
agent tie to success of
principal

8. Types of Organization
Pros/Cons
Type Definition Risks Set up Liability Decision Life of Tax Cost of Exam
making biz Capital ple
Proprietorship Single owner Wealth easy Unlimite Simple Dies Profit high Artist
of d by by with =owner s,
Highest owner/ owner owner owner income farm
number of bad once taxed ers
firms decisio
n
Partnership 2 or more Owners easy Joint Diversifie Survive high Law
owners wealth/ unlimite d until all Profit or firm
capital d by Slow and partner owner
shortag each expensiv leave income
e partners e once taxed
Corporation Stockholders Limited Slow, perpetu Capital Low
for their expensiv al gain tax , Large
Highest initial e due to retained scale
revenue investme complex earning
nt manage twice, Long
ment dividend term
structure once contra
cts cut
labor
costs

9. Achievement/coordinat Definition firms market
or of economic activity
Firms Vs Market
Lower transaction cost Searching time Lower cost Higher cost
Reaching Agreement
Economies of scale When cost of a unit With specialization Hand tool method is
more production falls and labor division costly
lower
Economies of scope Specialized expensive Produce range of
resources get together goods and services
Economies of team Mutually supportive task Firm as a team
production In team