Man Ec: #1

Question 1

The theme propounded in the lesson is that business enterprise took the place of _________ ________ in coordinating the activities of the _________ and allocating its ________ .

Answer 1

market mechanisms; economy; resources.

Question 2

In many sectors of the economy the ______ hand of ______ replaced what Adam Smith referred to as the ______ hand of market force.

Answer 2

visible; management; invisible

In other words businesses started to take the place of the natural market

Question 3

What definition is given in the text for the word “firm”.

Answer 3

Though this word is difficult to define here is what is given:

“a conscious, willful effort to organize economic activity that consists of a collection of contracts when more than one party is involved.”

It means that people INTENTIONALLY get together and make contracts for the purpose of organizing economic activity (rewording)

Question 4

A firm is obviously not a person, but rather a legal entity. What does this mean in association with the government? (two points)

Answer 4

• It means that it is recognized by law

- It is permitted to enter into binding contracts with other persons or firms.

Question 5

What is another term used in the lesson that is somewhat synonymous with “firm”.

(hint: starts with an “o”)

Answer 5

Organization

Question 6

There are two forces that decide how an organization/firm decides to organize their “intentional economic activity”. What are they?

Answer 6

Internal and External forces.

Question 7

There are two intuitive points mentioned implied by the section of the firm definition: “conscious, willful effort to organize economic activity. What are those two points?

Answer 7

1) There must be a motivation for having the firm in the first place.
2) There may be a way to organize the same economic activity that is not willful (Adam Smiths invisible hand)

Question 8

Traditional economists focus on the concept that the “conscious, willful effort to organize economic activity” or motivation is to profit maximization. However, the book uses a broader term. What is the term, and what does it mean?

Answer 8

Efficiency: (their definition) a particular way of organizing economic that leaves no other possible alternative arrangement, with the given resources, that would leave all parties just as well off.

(my definition): if its the best way to do something that allows all parties to receive the best benefit/ least detriment

Question 9

There are three dimensions/factors that determine the best, or most efficient, way for organizations to meet the needs of society. If they change then firms must change. What are they?

Answer 9

1) economic environment
2) technology
3) availability of information

Question 10

For a firm to have more than one person in it there has to be something that holds them together. This is like family bonds. In a firm what is used as the glue to keep things together?

Answer 10

Contracts.

Question 11

What is a contract? What purpose do they have in firms (2)?

Answer 11

-It is an agreement between two or more people that specifies tasks, decision making power, etc.

• 1) coordinate actions of people in meaningful ways
• 2) provide motivation to the parties.

Question 12

What is the difference between an internal and external contract? Which is more explicit?

Answer 12

Internal is with internal people to the firm, external is external to the firm. Duh.

External is more explicit

Question 13

Traditionally it is said that firms seek to maximize profits. What goes against this claim?

Answer 13

Many things: businesses buy big building that are expensive, supporting social causes, etc.

Question 14

In a theory of finance it is said that the goal is to maximize the market value of the shares of shareholders. What goes against this?

Answer 14

The fact that CEO’s and other employees may have selfish desires that keep this from happening.

Question 15

In terms of economic study how does scarcity and allocation play a role?

Answer 15

Scarcity means that there is a limited amount of resources to go around and allocation means there has to be some way to distribute those resources.

Question 16

In considering the difference of firms organizing economic activity rather than the market, is there only one that exists at a time?

Answer 16

No they both exist to different degree’s.

Question 17

There are two concepts used to measure the amount of PRODUCTION in an economy. What are they? The measures will differ depending on the economy’s openness to ______ ownership and trade.

Answer 17

GDP (gross domestic product)
GNP (gross national product)
Foreign

Question 18

Describe what GDP measures versus GNP.

Answer 18

GDP is everything produced in the borders of the USA whether it is foreign or native.

GNP is everything produced by USA owned business and workers. (book def.: the incomes of the resident of a country including incomes earned abroad, but excluding payments made to those abroad).

Question 19

What does the term “real” mean in relation to measurements of GDP &GNP?

Answer 19

It means they are adjusted for inflation

Question 20

Most firms today produce _______ goods. How are these goods defines?

Answer 20

intermediate; this means they are subject to later processing by another firm

Question 21

What are final goods?

Answer 21

Goods that are consumed by an end user.

Question 22

What form of business organization has the most firms by percent? (sole proprietorship, partnership, corporation)

Answer 22

sole proprietorship take up about 80%

Question 23

What are the two advantages of a sole proprietorship and the three disadvantages

Answer 23

A

1) easily and inexpensively formed
2) Single tax

D

1) hard to raise capital
2) unlimited liability
3) company dies when owner does

Question 24

What are the two advantages to a partnership and the four disadvantages?

Answer 24

A

1) ease and low cost of formation
2) Single tax

D

1) unlimited liability
2) limited life of company
3) difficulty to transfer ownership
4) hard to raise capital

Question 25

What are the three advantages and two disadvantages of a corporation?

Answer 25

A

1) limited liability
2) easy transfer of ownership
3) unlimited life

D

1) cost and difficulty of forming
2) double tax

Question 26

In a corporation what is the liability of the stockholder limited to?

Answer 26

The amount contributed into the firm.

Question 27

What are the four attributes of firms as assigned by Alfred D. Chandler?

Answer 27

1) The firm is a legal entity
2) Organizations are administrative units
3) Firm becomes a pool of physical facilities, learned skills, and liquid capital
4) Major corporations are currently the largest deciding parties in how goods and services are produced and they have the burden of deciding how this is also done in the future

Question 28

As administrative units firms have people engaging in similar behavior, and members specialize in tasks that help with the big picture. What part of the firm definition does this relate to?

Answer 28

This relates to arranging economic activity.

Question 29

It was stated in another question that:

“There are three dimensions/factors that determine the best, or most efficient, way for organizations to meet the needs of society. If they change then firms must change. “

This also relates to the differences among the theories of economics which concern three major items.What are they?

Answer 29

1) availability of information
2) operational environment
3) unit of analysis

Question 30

What is the oldest theory of economics, and what type of information do economic agents have in this theory? How is information distributed, and why is this so?

Answer 30

Neoclassical; perfect information; information is distributed symmetrically, because all parties have the same information.

Question 31

Which theory presents the idea of asymmetric information, and what is meant by this?

Answer 31

principal-agent theory of firm organization; asymmetric information is when at least one party to an agreement has better information than the other party.

Question 32

In the principal-agent theory considers the availability and accuracy of information and the possibility that those involved will act selfishly. With this there is a basic assumption called ________ _______. What does this mean?

Answer 32

bounded rationality; this means that information is costly which means agreements are made with less than perfect information

10

Question 33

In the principal-agent theory opportunistic behavior is mentioned. What does this mean?

Answer 33

It means that people will act in their own selfish interests at the expense of others.

Question 34

Because of things like bounded rationality and opportunistic behavior there is something called transaction costs in the principal-agent theory. What does this mean.

Answer 34

it means there are costs above and beyond the contracted prices such as acquiring information, monitoring performance, committing assets, etc.

Question 35

What does the “make-or-buy decision refer to? What will a firm choose if costs are similar?

Answer 35

It is the consideration as to whether the firm should make something in-house or contract it out. If the costs are similar then the company will usually do it in-house.

10

Question 36

What is the newest theory of economics? What is the unit of analysis?

Answer 36

the evolutionary theory of the firm; the firm and its productive processes

10

Question 37

What three related aspects of organization does the evolutionary theory of the firm focus on?

Answer 37

1) structure
2) strategy
3) core competency

10

Question 38

When does a company have a core competency?

Answer 38

When it has an advantage in producing a good or service and new related products.

10

Question 39

According to Chandler, what was the first modern business enterprise? Why was this a cornerstone in the development of the U.S. and its industries?

Answer 39

The railroads, and because they allowed the shipment of large volumes of product great distances at a reasonable cost.

Question 40

What was the hallmark of the “second industrial revolution” in the 19th century?

Answer 40

mass production

Question 41

For economists what is the key organizational points for mass production?

Answer 41

reliable input and reliable output market (if to unstable in aggregate demand or labor it would be difficult to function)

Question 42

What is vertical integration?

Answer 42

It is when a firm takes over more than one stage of the production process

Question 43

What are economies of Scale? What are economies of scope?

Answer 43

Scale: the reduction in average unit cost as output expands. (The more you make the cheaper per unit.)
Scope: cost advantage from producing related, yet different goods.

Question 44

What is Taylorism? What are the three underlying rules?

Answer 44

This is scientific management that had the goal of reducing the amount of thought and movement needed by the worker.

1) specialization of tasks
2) predetermined rules
3) evaluation of performance

Question 45

What are some things mentioned in the lesson that lead to the break down of mass production systems?

Answer 45

Management became disconnected from share holders, external forces (price, foreign competitors, technology changes, change in consumer preferences, etc.),

Question 46

As mass producing went down in popularity mergers went up. There were two big forces around this time, the 1980’s that crept forward. What are they

Answer 46

1) Mergers as mentioned (to close gap between stockholders and management)
2) production that could be tailored.

Question 47

What are junk bonds (closely related to mergers).

Answer 47

bonds with a very high risk of default. seemed to be used to finance takeovers by securing bonds against the acquired corporation.

Question 48

What is a flexible manufacturing system. What type of system was this in part replacing? How did this effect relationships with suppliers?

Answer 48

this is a system that can produce a wide variety of products. It in part was a movement to replace the mass production system. The relationships with suppliers had to be better.

Question 49

The idea of decentralization emerged as corporations moved away from mass production systems that involved hierarchy, and was one of the first major effects on corporations. What is decentralization?

Answer 49

It means that more power is in the hands of the independent business units.

Question 50

What does the term “concentration” refer to?

Answer 50

the importance of large producers in a market

Question 51

TQM and business re-engineering helped to make workers more efficient. What trend follows these often?

Answer 51

people losing their jobs, because the work is done better.

Question 52

What is the obvious difficulty that comes with companies keeping only the best most productive workers?

Answer 52

This means that those displaced/let go are the least likely to be hired.

Question 53

What is a virtual corporation?

Answer 53

A temporary network of companies that come together quickly to exploit changing market conditions.

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Question 54

Social costs are the costs of reaching an agreement that are above and beyond the contracted prices.

true

false

Answer 54

b

Costs of agreement above contract prices are transactions costs. Social costs are externalities that impose costs on parties not involved in the private market transactions that produce such costs, e.g., polluted air or water, noise, or congestion.

Question 55

A prime example of asymmetric information relates to workers shirking because they are not informed of their company’s work standards.

true

false

Answer 55

b

Companies make sure their workers understand the firm’s work expectations. Asymmetric information with respect to shirking is that the company supervisors are not always able to monitor the effort of employees.

Question 56

A transaction is efficient if the sale makes the buyer only a little worse off but, at the same time, makes the seller a lot better off.

true

false

Answer 56

b

Efficiency (see page 2 of the textbook) requires that all parties involved must be at least as well off. Who is to judge whether the disadvantage a buyer suffered would be more than offset by the gain of the seller? The buyer certainly wouldn’t claim that such a transaction is efficient.

Question 57

It is possible that firms may choose to coordinate economic activity through markets rather than through other organizational forms.

true
false

Answer 57

a

Activity can be coordinated by direct orders through an organizational hierarchy or by buying and selling through a market. Some interdivisional transactions of corporations are done on the basis of market prices also.

Question 58

A core competency exists when a firm has an advantage in producing a good or service and also has an advantage in producing new, related goods or services.

true
false

Answer 58

true

This is a part of the modern approach to production that is more flexible than the less-flexible mass production.

Question 59

Bounded rationality means that because of the desire to improve their lives, people are bound to be profit and utility maximizers.

true
false

Answer 59

false

Bounded rationality means that people are limited by having incomplete information and limited capacity to process information in their decision processes.

Question 60

Selling a “lemon” is made possible by the existence of asymmetric information.

true
false

Answer 60

true

Because the buyer does not know the car is a lemon, he may assume it is being sold because the seller wants to switch to a convertible.

Question 61

According to the textbook, the inflexible mass-production system failed to meet the needs of buyers and producers, so it broke down and just disappeared.

true
false

Answer 61

true

Flexible manufacturing systems (see page 17 of the textbook) were developed to meet today’s preferences and market conditions, and their prevalence and significance lead the textbook to conclude that flexible manufacturing systems have replaced the system of inflexible manufacturing. Some (in fact, quite a bit) of mass production continues, but it is no longer the system prevailing in America. It may one day be possible to say that the system of land-line telephony has broke down and disappeared, and that may be possible before the last land-line phone has disappeared from use.

Question 62

Asymmetric information exists when one party to a transaction has information that significantly affects the costs and benefits accruing to both parties, but opportunistically withholds that information from the other party.

true
false

Answer 62

true

This is a correct description of pre-contractual opportunism. An individual applies for maternity insurance without mentioning to the insurer, for example, that she is already pregnant or plans to be so as soon as the coverage is in place.

Question 63

When a car owner wants to sell his or her car privately because it is a “lemon,” not divulging the car’s problems in order to make the sale is referred to as scientific management.

true
false

Answer 63

false

Scientific management, or Taylorism, is totally different. This “lemon problem” is one of asymmetric information or adverse selection.