David K.H. Begg, Gianluigi Vernasca-Economics-McGraw Hill Higher Education (2011)

CHAPTER 6 Introducing supply decisions
0 In Germany> hostile takeovers have traditionally been rare. In contrast, many UK takeovers are hostile bids
uninvited by existing managers. Some economists see hostile bids as a vital force for efficiency. The threat of
hostile takeovers deters managers from departing too far from the profit-maximizing policies that shareholders
want. Slack management leads to low profits, depressed share prices and opportunities for takeover raiders to
buy the company cheaply. The threat of takeover provides a discipline that helps overcome the principalagent
problem.
Obviously not all hostile takeovers end successfully, since the existing shareholders may refuse the offer made
by the buyer. An example of an unsuccessful takeover is the recent attempt by Microsoft to gain control of
Yahoo! On 1 February 2008, Microsoft made an unsolicited bid to purchase Yahoo! This offer was rejected on
10 February and on 3 May Microsoft finally withdrew the offer.
T_h_ e _ fi r_m_'s _ s _ up _ p _ ly_d_ e c_ is _ i o_n -
Firms produce goods and services that are sold in markets. We want to understand how a firm decides how
much to produce of a given good or service.
Suppose a firm makes spoons. The firm needs to decide how many spoons to produce and sell. The first
thing that the firm should consider is how costly it is to produce the spoons. Some ways to make spoons
use lots of labour and few machines, other ways use many machines but little labour. The firm knows
different techniques for making spoons and the cost of hiring inputs - the wage rate for workers and rental
for leasing a machine. The second thing that the firm must consider is the demand condition. The firm
knows its demand curve. This is the demand curve derived from all the customers who want to buy the
spoons made by that particular firm. If the firm knows the demand curve it faces, then it knows its revenue
from selling different quantities of spoons at different prices.
Knowing costs and revenues generated by different amounts of spoons produced, the firm is able to find
the profit generated by those amounts, since profit is simply revenues minus costs.
The firm chooses the level of output (here, the number of spoons produced and then sold in the market)
in order to maximize its profits. Changing the level of output produced affects both the costs of production
and the revenues from sales. Costs and demand conditions jointly determine the output choice of a pro.fitmaximizing
firm.
Cost minimization
Closely related to the idea of profit maximization is the concept of cost minimization. Indeed, profit
maximization and cost minimization can be seen as two equivalent concepts. A profit-maximizing firm
certainly wants to make its chosen output level at the minimum cost possible. By producing the same
output at lower cost, it could increase profits. Thus a profit-maximizing firm must produce its chosen
output as cheaply as possible.
Total cost
Knowing the available production methods and the costs of hiring workers and machines, the firm
calculates the least cost at which each output can be made. It is not worth using many machines to make
only a few spoons; to make more spoons, it makes sense to use more machines.
Table 6.3 shows various outputs in column (1). Column (2) shows the minimum cost at which each output
can be made. The firm incurs a cost of £10 even when output is zero. This is the cost of being in business
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