Firms And Markets Flashcards
What is a firm?
A business organisation that:
Employs people
Purchases inputs to produce outputs that are market goods/services
Sets prices greater than the cost of production
What are the two ways that labour is divided in a capitalist economy?
Firms
Markets
How does coordination within a firm occur?
Firms have a concentration of economic power in the hands of the owners/managers, allowing them to issue direct commands to the workers
How does coordination occur in markets?
Power is decentralised in markets, so decisions are autonomous and voluntary
What contracts are used in a market situation?
Contracts for products sold in a market permanently transfer ownership of goods from seller to buyer
What contracts are used in relation to labour?
Contracts for labour temporarily transfer authority over a person’s activity from employee to manager or owner
When relationships within firms extend to long periods of time, what does this lead to?
The creation of network of products
Acquisition of skills specific to the job
When a relationship is ended, what happens to firm-specific assets?
They are lost, as they re only of value when an employee is employed by the single firm, thus losing value for both parties when the relationship ends
What is the consequence of managers and owners being separate parties in firms?
There is a separation of ownership and control, since managers control everyday operations, but not the overall running of the firm
What is asymmetric information, and when does it occur?
Asymmetric information is when people don’t know exactly what their subordinates do all the time, so they don’t know if all of their directions are carried out. It occurs between the hierarchical levels of firms.
What creates a conflict of interest between the manager and employees, and the owners of firms?
The managers and employees actions have impacts in the profits, but since the profits belong to the legal owners of the firm, they won’t necessarily see any benefit from increased profits
How may owners and shareholders solve the conflict of interest between themselves and managers?
They may link the pay of the managers to the company profits, through raises and bonuses if the targets are met
How are contracts between employees and firms incomplete?
Some events depend on future events
Some aspects of the job are difficult to measure and base wages on
They do not specify every aspect of exchange
Why may workers work hard when firms can’t measure effort?
Work ethic Feelings of responsibility Reciprocation of gratitude For a promotion Fear of being fired
