CEE40 Final Firms, Orgs, and Labor

What is a firm?

A business organization that employs people, purchases inputs, produces goods/services, and seeks profit.

How does coordination within firms differ from coordination through markets?

Firms coordinate through managerial authority, while markets coordinate through prices and voluntary exchange.

What is the role of owners in a firm?

They determine long-term strategy.

What is the role of managers in a firm?

They implement strategy by assigning tasks and monitoring workers.

What is the role of workers in a firm?

They perform assigned tasks.

What is an incomplete contract?

A contract that cannot specify or enforce every aspect of an exchange affecting the parties involved.

What is asymmetric information within a firm?

Managers or owners do not fully know what subordinates know or do.

How can conflicts between managers and owners be reduced?

By linking manager pay to company performance and monitoring managers through a board of directors.

Why do workers work hard when effort is difficult to measure?

Work ethic, promotion opportunities, and fear of being fired.

What is employment rent?

The cost of losing a job, including lost income, benefits, relocation costs, and social costs.

What is a reservation wage?

The value of a worker's next best alternative, such as another job or unemployment benefits.

What is a cooperative firm?

A firm owned mostly or entirely by workers who hire and fire managers.

What is the gig economy?

An economy where workers provide services through digital platforms connecting them to customers.

What is a principal-agent problem?

A problem that arises when one party (agent) acts on behalf of another (principal) under an incomplete contract.

What are increasing returns to scale?

Output increases by a greater proportion than inputs.

What are constant returns to scale?

Output increases by the same proportion as inputs.

What are decreasing returns to scale?

Output increases by a smaller proportion than inputs.