Firms' Decisions and Strategies Notes

H2 Economics Chapter 3 Notes This document is intended as a summary of the points provided in the NJC 2024 H2 Economics Chapter 3 Seminar Notes. It is to be used as a study guide to provide a structure for studying the Chapter 3 Notes. 1 Introduction to Firms Before we begin our study, let us clarify the focus of our study. We are studying individual firms’ decisions and strategies individually. We are NOT studying the decisions and strategies of firms as a whole industry. 1.1 Key Terms and Concepts Chapter 3 is the most difficult chapter for students to completely understand because the scope of content is extremely large. Hence, the approach to studying this chapter is to first master the big idea of the chapter, before understanding each subsection in great detail. It is highly advised that you spend a large amount of time to properly and fully understand the basic concepts covered in this section before moving on to any other sections. A Firm is a business organisation that hires factors of production, combines them in a productive process to create and sell the resulting output for a profit. A Plant (or factory) refers to the geographical location where the actual production is carried out. A firm may own one or several production plants. An Industry refers to a group of firms producing similar goods or services. Firms within the same industry are usually competitors in the same market. Profit (π) is the difference between total revenue (TR) and total cost (TC) of production Short Run is defined as a period over which at least one factor of production is fixed. In the short run, output can only be adjusted by changing the quantities of variable factors. Long Run (LR) refers to a period of time extensive enough to allow the firm to change all resources employed within the confines of a given state of technology. 1

Important Things to Note and Key Clarifications Firm What is a firm? Typically, a firm is seen as a separate entity from its shareholders, i.e. those who own the firm. A firm is typically seen more as an intangible entity which is defined by (1) its profit-maximising objective and (2) its ability to hire factor inputs to produce goods and services. Separation between employees and shareholders: ● Shareholders are the owners of a firm. Typically, they own a part of the firm by investing in shares of the firm. When the firm profits, the shareholders receive part of the profits in terms of dividends. Shareholders typically ma