This chapter begins the focus on the economics of the firm. There is substantial accounting literature on the proper way to account for the past actions of a firm. There are also numerous finance books covering specific topics in the capitalization of a firm. In this book, we touch on relevant accounting concepts and analyze briefly the capitalization of a firm. However, our focus is something often treated as an assumption in many of these texts: how a firm earns money.

The fundamental economics of a firm revolve around earning a profit. Accounting and capitalization are important, but there can be well-capitalized, properly accounted firms that go out of business and sloppily managed firms that stay in business for years. Therefore, an understanding and modeling of the process of earning a profit should be the core of business economics.

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