Economics (week 3)

Question 1

What is a firm?

Answer 1

A firm is an institution that facilitates a team of people to purchase resources and transform them into a product that is offered for sale. It is a functional definition, emphasizing what a firm does.

Question 2

Functions of Firms

Answer 2

Firms engage in activities such as raising finance, procuring materials, employing workers and managers, organizing production and marketing, and distributing profits among the owners.

Question 3

Evolution of the Modern Firm

Answer 3

The concept of firms has evolved over time. Early firms included farms and merchant partnerships. In the 17th and 18th centuries, large firms were chartered by the state, and the Industrial Revolution led to the development of large factories.

Question 4

The Firm as a Risk-Bearer (Cantillon)

Answer 4

Richard Cantillon’s view: Entrepreneurs founded firms to anticipate product demand, hire labor on fixed wages, and bear the risk of product price volatility. This effectively “insured” workers against uncertainty.

Question 5

The Firm as a Planning Unit (Hayek)

Answer 5

Friedrich von Hayek regarded firms as privately-owned planning units. He emphasized the importance of markets for individual freedom and believed that local decision-making was more efficient when informed by local prices.

Question 6

Optimizing the Boundaries of the Firm (Coase and Williamson)

Answer 6

Ronald Coase suggested that coordination of complementary activities is more efficient within a firm, and Oliver Williamson focused on transaction costs, highlighting that owning complementary activities within the same firm reduces uncertainties.

Question 7

The Firm as an Innovator (Schumpeter)

Answer 7

Joseph Schumpeter’s theory of economic development sees capitalism evolving through waves of innovation. Large firms play a role in introducing novel technologies and products to global markets.

Question 8

Technological Innovation and the Multinational Enterprise

Answer 8

Large firms involved in technological innovation and serving global markets often bring various activities under common ownership and control (internalization) to maintain control and protect intellectual property.

Question 9

Organizational Structure Under Internalization

Answer 9

Internalization can be achieved through various structures, such as strong hierarchy, weak hierarchy, and divisionalization, to coordinate and manage various activities within a firm.