6 - The Firm: Owners, Managers, and Employees Flashcards
(40 cards)
How does coordination differ between firms and markets?
Firms:
* Centralised economic power
* Managers issue commands to employees
* Employees expected to comply
Markets:
* Decentralised power
* Buyers and sellers act independently
* Buyers and sellers are not expected to comply
How do owners differ from managers and employees?
Owners - Decide long-term strategy of company, directing managers to implement these decisions
Managers - Assign tasks to employees to meet ownership directives
Employees - Carry out tasks from managers
Why is there asymmetric information between the three layers in a company?
Owners and managers do not necessarily know if their commands are carried out.
How did Coase describe the firm?
A miniature, privately-owned, and centrally planned economy.
What is the difference between a sale and wage labour contract?
Sale contract - Transfers ownership
Wage labour contract - Transfer authority of labour while at work (i.e. rent the employee’s labour)
Why are all three layers of the firm united in their common interest for firm success?
All suffer if the firm fails.
Skills, networks and friendships are firm-specific assets which you lose if it goes out of business.
Why do the three layers of the firm disagree?
Disagreement as to how to distribute profits from firm success amongst themselves.
How can the owners benefit from the managers and employees?
If revenues increase and all else remains the same.
How do small enterprises differ from larger enterprises?
Small enterprises often:
* are owned by the managers
* cannot outsource to a low-wage location
Larger enterprises often:
* are owned by many (shareholders)
* use capital to finance growth via managerial decision-making
How can the separation of ownership and control lead to conflicts of interest?
Decisions taken by managers may not be in the interests of the owners.
They may try to minimise work hours, increase personal power etc.
How can the separation of ownership and control be solved?
Either by:
* offering managers ownership (i.e. shares)
* shareholder revolt by forcing management out
What are the assumptions we make about the firm?
- Owners have strong interest in profit maximisation
- Market competition penalises those that cannot make substantial profits for owners
What do firm profits depend on?
- Costs of acquiring inputs for production
- Output
- Sales revenues from selling goods or services
What is contractual incompleteness?
The fact that:
* the firm cannot know exactly what an employee needs to do
* it is impractical for a firm to observe exactly how much effort each employee makes in doing the job
Why are piece rate contracts almost impossible?
- Difficult to measure output that a person is producing in modern, knowledge based companies.
- Employees rarely work alone
How can employment rents benefits owners and managers?
- Employee is more likely to stay with the firm
- They can threaten to fire the worker
What are the costs of working?
- Disutility of work
- Cost of travelling to work everyday
What are the benefits of working?
- Wage income
- Firm-specific assets
- Social status of being unemployed
What are the main determinants of economic rent?
- The pay an individual gets
- How hard they work
What is the net utility per hour?
Wage - disutility of working per hour
Where is Maria’s employment rent on this graph?
What happens to employment rent if an individual receives unemployment benefits?
Economic rent falls by the amount of unemployment benefits per hour.
What will workers do when the employment rent is large?
Work harder to reduce risk of losing job.
How can a firm increase the employment rent?
Raising wages.
Assuming all else is constant.
