lecture 5- the firm: owners, managers and employees Flashcards
what is a firm?
it is an actor in a capitalist economy
one of the important initiations of capitalism
what does the interaction between firms and employees create?
jobs, conumers are supplied and profits are made
all of them gain
why are there problems between the interaction between a firm and employees?
they all gain but have conflicting interest regarding the share of these gains
what is a key capitalist feature?
the division of labour
what is the division of labour?
when people engage in different tasks as part of production
where is divided of labour usually done?
either in firms or markets
what is the capitalist economy?
defined by firms, markets and private property
how do firms differ from markets?
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
what is the decision making progress in a firm?
- board of directors
- manager
(both have power of employees) - employees
what is involved in the definition of a firm?
- employs people
- purchases inputs to produce market goods and services
- set prices greater than cost of production
- has a decision making structure
what did Coarse say about firms?
firms are planned miniature economies
how is the relationship of a firm and employees defined?
through contracts
what does a wage labour contract do?
gives employees the right to direct their activity at certain times for a particular period
what does a sale contract do?
transfers ownership
why are wage labour contracts incomplete?
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
what is an employee rent?
a gain
if they are paid a wage higher than their reservation wage they receive an employment rent
how is employment rent linked to effort?
if they are gaining they are more likely to put in a good days work
how do you work out employment rent?
ER = wage - Reservation Wage - disutility of effort
what are the costs of job loss?
- lost income
- costs aquired to start a new job
- loss of non wage benefits (insurance)
= social costs (stigma)
what is the reservation wage?
value of the next best option
unemployment
how can managers also fear getting sacked>
owners have power over them so lose employment rent of power and income
what is the labour discipline model?
it measure an employees wage and effort with isocost lines
what would an employees best response to wage an effort be?
one which blanches the desire to keep job and also not to be exhausted
how do employers know what wage to set?
must know how their effort will respond to certain wages
can be shown on labour discipline model
