B. BUSINESS ORGANIZATIONS

THE NATURE OF THE FIRM

So far we have talked about production functions as if they were machines that could be operated byanyone:

put a pig in one end and a sausage comes out the other: In reality, almost all production is done by specialized organizations-the small, medium, and large businesses that dominate the landscape of modern economies. Why does production generally take
place in firms rather than in our basements? Firms or business enterprises exist for man}’ reasons, but the most important is that business firms are s~ciali:ed organizations devoted 10 managing the process of production. Among their important functions are
exploiting economies of mass production, raising funds, and organizing factors of production.

The most compelling factor leading to the organization of production in firms arises from economies of mass production. Efficient production requires specialized machinery and factories, assembly lines. and the division of labor into many small operations. Studies indicate that efficient production of automobiles requires production rates of at least 300,000 units per year.

We could hardly expect that workers would gather spontaneously to peform each task correctly and in the right sequence. Or, for the example of baseball, how likely is it that 25 people would organize themselves into just the right combination of pitchers, catchers. and hitters. all in the ril{lItorder and using the best strategy? In fact. we ru-ed firms to coordinate the production process, purchasing or renting land, capital. labor, and materials. If there were no need for specialization and division of labor, we could each produce our own electricity, digital’  watch, and compact disc in our own backyard. We obviously cannot perform such feats; efficiency’ generally requires large-scale production in businesses,

A second function of firms is miring moutal5 for large-scale production. Developing a new commercial aircraft costs wdl over $1 billion; the research and development expenses for a new computer microprocessor, like Intel’s Pentium chip, are just as high.
Where are such funds to come from? In the nineteenth century, businesses could often be financed by wealthy, risk-takiilg individuals. But the days of such fabulously wealthy captains of industry are pasL Today, in a private-enterprise economy, most funds for production must come from company profits or from money borrowed in financial markets. Indeed,  efficient production. by private enterprise would be virmally unthinkable if corporations could not raise billions of dollars each year for new projects.

A third reason for the existence of firms is to manage tIu production JIr’rIasS. The manager is the pe~n who organizes production, introduces new ideas or products or processes, makes the business decisions, and is held accountable for successor failure. Production cannot, after all, organize itself.Someone has to supervise the construction of a new factory, negotiate with labor
unions, and purchase materials and supplies. If you were to purchase the franchise for a baseball team, you would have to rent a stadium, hire baseball players, negotiate with people for concessions, hire ushers, deal with.unions, and sell tickets. Once all these factors of production are engaged, someone has to monitor their daily activities to ensure that the job is being done effectively and honestly. Business firms are specialized organizations devoted to managing the process of production. Production is organized infirms because efficiency generallv requires large-scale production. the raising of significant financial resources. and careful management and monitoring of ongoing activities.

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