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1
Q

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

A

market mechanisms; economy; resources.

2
Q

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

A

visible; management; invisible

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

3
Q

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

A

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)

4
Q

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

A
  • It means that it is recognized by law

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

5
Q

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

(hint: starts with an “o”)

A

Organization

6
Q

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

A

Internal and External forces.

7
Q

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?

A

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)

8
Q

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?

A

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

9
Q

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?

A

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

10
Q

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?

A

Contracts.

11
Q

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

A

-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.
12
Q

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

A

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

External is more explicit

13
Q

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

A

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

14
Q

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?

A

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

15
Q

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

A

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.

16
Q

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

A

No they both exist to different degree’s.

17
Q

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.

A

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

18
Q

Describe what GDP measures versus GNP.

A

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).

19
Q

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

A

It means they are adjusted for inflation

20
Q

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

A

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

21
Q

What are final goods?

A

Goods that are consumed by an end user.

22
Q

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

A

sole proprietorship take up about 80%

23
Q

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

A

A

1) easily and inexpensively formed
2) Single tax

D

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

24
Q

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

A

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

25
Q

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

A

A

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

D

1) cost and difficulty of forming
2) double tax

26
Q

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

A

The amount contributed into the firm.

27
Q

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

A

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

28
Q

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?

A

This relates to arranging economic activity.

29
Q

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?

A

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

30
Q

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?

A

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

31
Q

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

A

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

32
Q

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?

A

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

10

33
Q

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

A

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

34
Q

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

A

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

35
Q

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

A

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

36
Q

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

A

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

10

37
Q

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

A

1) structure
2) strategy
3) core competency

10

38
Q

When does a company have a core competency?

A

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

10

39
Q

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?

A

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

40
Q

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

A

mass production

41
Q

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

A

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

42
Q

What is vertical integration?

A

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

43
Q

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

A

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.

44
Q

What is Taylorism? What are the three underlying rules?

A

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

45
Q

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

A

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

46
Q

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

A

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

47
Q

What are junk bonds (closely related to mergers).

A

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

48
Q

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

A

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.

49
Q

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?

A

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

50
Q

What does the term “concentration” refer to?

A

the importance of large producers in a market

51
Q

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

A

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

52
Q

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

A

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

53
Q

What is a virtual corporation?

A

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

22

54
Q

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

true

false

A

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.

55
Q

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

true

false

A

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.

56
Q

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

A

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.

57
Q

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

true
false
A

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.

58
Q

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
A

true

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

59
Q

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

true
false
A

false

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

60
Q

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

true
false
A

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.

61
Q

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
A

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.

62
Q

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
A

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.

63
Q

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
A

false

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