READING ASSIGNMENTS
UNIT TWO (FOR EXAM TWO)
Your second reading assignment in Unit Two is pp. 572-586. Study the author's presentation of the economies and diseconomies of scale on pp. 574-578. You would expect manufacturing firms to achieve signifcant economies of scale over a wide range of output. The high fixed costs these firms must pay for plant and equipment mean that they will achieve economies of scale as output increases. Alternatively, professional service firms (e.g., accounting and law firms) may find that it is difficult to maintain the original level of quality as they expand. Since monitoring costs are high, such firms can experience diseconomies of scale even at low levels of output.
Note the distinction between accounting profit and economic profit on p.583. A certain amount of profit is necessary in order to stay in business, or, as economists would say, to keep resources (that is, labor, land, and capital) currently utilized. This is known as normal profit, and without it an entrepreneur would exit the business and find something else to do to earn a living. In some cases, an entrepreneur is really successful and may achieve profits far beyond the minimum needed to keep the business running. This is referred to as economic profit. A company such as Microsoft has moved well beyond earning a normal profit. Microsoft earns a huge amount of economic profit. Note that the entrepreneurial function may be performed by a tiny sole proprietorship or a large corporation. As long as money is at risk when a product is introduced, then entrepreneurship is occurring. Large companies with deep pockets can afford to flub a new product now and then and still remain in business, whereas a sole proprietor may be unable to afford a misstep and might even go out of business if his product introduction goes poorly. However, both situations are examples of entrepreneurship.
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