ECON 103 Lecture Notes - Lecture 15: Opportunity Cost, Profit Maximization, The Incentive
18 Aug 2018
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Document Summary
Chapter 8: costs and the supply of goods. Incentives, cooperation, and the nature of the firm. Residual claimants: individuals who personally receive the excess of revenues over costs. They have the incentive to increase revenues or reduce costs. There are two ways to organize productive activity: contracting: using outside producers for specific tasks, team production: where employees work together under the supervision of the owner (or o(cid:449)ner"s representati(cid:448)e) Shirking: working at less than the expected rate of productivity, which reduces output. Principle-agent problem: the incentive problem that occurs when the purchaser of services lacks full information about the circumstances faced by the seller, and therefore, cannot know how well the seller performs the service. Top level executives hired to manage a firm do not have same objectives as owners who care mainly about profit maximization. 3 types of business firms: proprietorship: a business firm owned by a single individual.
