lecture 5- the firm: owners, managers and employees

Question 1

what is a firm?

Answer 1

it is an actor in a capitalist economy

one of the important initiations of capitalism

Question 2

what does the interaction between firms and employees create?

Answer 2

jobs, conumers are supplied and profits are made

all of them gain

Question 3

why are there problems between the interaction between a firm and employees?

Answer 3

they all gain but have conflicting interest regarding the share of these gains

Question 4

what is a key capitalist feature?

Answer 4

the division of labour

Question 5

what is the division of labour?

Answer 5

when people engage in different tasks as part of production

Question 6

where is divided of labour usually done?

Answer 6

either in firms or markets

Question 7

what is the capitalist economy?

Answer 7

defined by firms, markets and private property

Question 8

how do firms differ from markets?

Answer 8

power is concentrated in a firm in the hands of managers and owners, decisions made by selected people

in a market there is a decentralisation of power in that decisions are made by millions of people

Question 9

what is the decision making progress in a firm?

Answer 9

• board of directors
• manager
  (both have power of employees)
• employees

Question 10

what is involved in the definition of a firm?

Answer 10

• employs people
• purchases inputs to produce market goods and services
• set prices greater than cost of production
• has a decision making structure

Question 11

what did Coarse say about firms?

Answer 11

firms are planned miniature economies

Question 12

how is the relationship of a firm and employees defined?

Answer 12

through contracts

Question 13

what does a wage labour contract do?

Answer 13

gives employees the right to direct their activity at certain times for a particular period

Question 14

what does a sale contract do?

Answer 14

transfers ownership

Question 15

why are wage labour contracts incomplete?

Answer 15

they omit certain aspects that cannot be included

• unmeasurable and can’t base wages on e.g effort
• cannot force employees to stay on job
• cannot predict future events

Question 16

what is an employee rent?

Answer 16

a gain

if they are paid a wage higher than their reservation wage they receive an employment rent

Question 17

how is employment rent linked to effort?

Answer 17

if they are gaining they are more likely to put in a good days work

Question 18

how do you work out employment rent?

Answer 18

ER = wage - Reservation Wage - disutility of effort

Question 19

what are the costs of job loss?

Answer 19

• lost income
• costs aquired to start a new job
• loss of non wage benefits (insurance)
  = social costs (stigma)

Question 20

what is the reservation wage?

Answer 20

value of the next best option

unemployment

Question 21

how can managers also fear getting sacked>

Answer 21

owners have power over them so lose employment rent of power and income

Question 22

what is the labour discipline model?

Answer 22

it measure an employees wage and effort with isocost lines

Question 23

what would an employees best response to wage an effort be?

Answer 23

one which blanches the desire to keep job and also not to be exhausted

Question 24

how do employers know what wage to set?

Answer 24

must know how their effort will respond to certain wages

can be shown on labour discipline model

Question 25

what is the marginal rate of transformation?

Answer 25

best response curve
rate in which one good must be scarified for another unit of another good

paying a higher wage in order to produce more effort

Question 26

why does the MRT/isoprofit line go flat at the top?

Answer 26

as wage increases so much they feel as though they don’t need to put in as much effort

Question 27

what is involuntary employment?

Answer 27

occurs as when employees are paid more than reservation wage firms cant afford to hire everyone

Question 28

what is the wage curve?

Answer 28

real world wages required for worker effort

Question 29

which way does the wage curve go?

Answer 29

upwards

Question 30

supply of labour must…

Answer 30

always be greater than the demand for labour

Question 31

if there is agreater degree of unemployment what happens?

Answer 31

manager and that have greater bargaining power

they can lower a persons reservation wage as need a job

Question 32

what is another way of doing business/

Answer 32

john lewis
each employee is an owner of capital goods
worker owned corporative

Question 33

why is worker owned corporative good?

Answer 33

• get bonuses if sales more
• so won’t slack as they will lose out, other employees don’t want others to slack
• need less management personnel
  inequalities in wages are less

Question 34

why would a worker adjust their effort?

Answer 34

accruing to the fairness of working conditions

Question 35

when would there be higher disutily/

Answer 35

if working conditions were unfair and they would recpiricoate by lowering effort

Question 36

what might be put in place for fairnesS?

Answer 36

employee policies

Question 37

why would better working conditions cause higher utility?

Answer 37

as it is an employee rent

Question 38

what isa trade union?

Answer 38

an organisation that can help to represent the interest of a group of workers in negotiations with employers about issues such as pay
can set strikes etc