Unit 6 Flashcards
How is the division of labour done in a Capitalist economy?
Through firms and markets
What did Herbert Simon state?
That firms would hire workers when the terms of what they’re going to do is set out.
If they’re not set out then they’re hired to follow the boss’s orders
What is the difference between the way that labour is coordinated in the market and in the firm?
Firms represent a concentration of power that is placed on the owners and managers that issue out directives and expect employees to follow them.
Markets are characterized by a decentralization of power, buyers and sellers make autonomous decisions
What did Ronald H Coase point out?
That the firm today can be seen as a miniature privately planned economy.
What is the social aspect of markets compared to firms?
There are important economic implications.
The shutting down of one, would have different effects on customers and individuals
How does the separation of ownership and control occur?
This occurs in the situation that managers decide what to do with other people’s funds.
The result is a conflict of interest
What did Smith state could be a way of incentivising managers to act in pursuit of owners interests?
- They could structure contracts so that their compensation depended on the performance of the company share price
- The board of directors could monitor the managers performance
Why can’t a complete contract of employment specifying what employees need to do be written out?
- It can’t know exactly what it will need the worker to do as it’s influenced by future economic events
- It would be impractical and costly to constantly measure effort that the employee is putting
- It could not be the basis of an enforceable contact
What are the main reasons why workers put effort into a job?
- Intrisitc motivation to do the job well
- They care about their co workers and clients and want to do the job well for them
- As an action of gratitude to their employer for giving them the job
What is the employment rent?
This is the economic rent that is received when the net value of their job exceeds the net value of their next best alternative
How does it benefit workers and managers if it’s met?
- The employee is more likely to stay with the firm reducing turnover costs
- The employee has something to lose therefore power can easily be exerted over them.
What factors increase reservation wage?
- Disutility of work
- Travel costs, etc
- Opportunities for alternative employment
- Unemployment benefits
What factors decrease reservation wage?
- Costs of searching for a new job
- Loss of firm specific assets
- Loss of benefits
- Social stigma associated with unemployment
How do you find employment rent?
Employment rent per hour x expected lost hours if not working
Plus unemployment benefit
What is the cost of a unit of effort
w/e
