Unit 6 Flashcards
(54 cards)
Where is power in firms
Power with owners and managers
Where is power in markets
Power decentralised so decisions are voluntary
Contract
Legal document Specifies actions that parties in contract must undertake
Contracts for goods
Permanent transfer of ownership
Contracts for labour
Temporary transfer of authority of persons activities from employee to manage r
Firm specific asset =
Skills and networks created at firm
Incomplete contracts
No enforceable way or does not specify every aspect of exchange of intrest with parties in contract
Example of incomplete contract
Firms and employees = aspects of jobs difficult to measure
Future tasks unknown
Piece rate pay
Employment where workers are paid per unit of output = incentive to work harder
Negatives of price rate pay
Hard to measure output
People often work in teams
Employment rent
Cost of job loss = income loss, relocation costs, loss of non wage benefits and social costs
Employment rent =
(Wage- disutiltiy of effort) - (reservation wage - disutilty of being unemployed)
What happens when employment rent is high enough
Higher incentive to put more effort in
How to increase ER
Increase wage
Best response curve
Optimal amount of effort workers will exert at each wage level
What is firms best response
Minimum cost per unit of effort -
Steeper isocost line =
Decreasing cost per unit of effort
Profit maxing firm
Steep isocost line
Involuntary unemployment
Being out of work but proffering to have job at conditions that other identical workers have
If no involuntary unemployment then…
No employment rent
No effort incentive
Why does workers best response curve change
High unemployment = decreased reservation wage
High unemployment benefit = increased reservation wage
Economies of scale
Output increases more than proportionally to inputs
Constant returns to scale
Output increases proportionally to inputs
Diseconomies of scale
Output increases less than proportionally to inputs
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