MGEC40H3 Study Guide - Midterm Guide: Quasi, Organizational Culture, Risk Aversion
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1) The Nature of the Firm, by Coase
Firm: what is it?
- A firm is an economic system that works by itself. Price is the central mechanism and
entrepreneur as the coordinating factor.
- supply-demand, production-consumption
Existence of firm: why firms emerge?
- Firms emerge to control other people. Motivation to be one’s own master and earn
- A contract is to limit entrepreneurship. The firm governs the direction of resources
within the limits of these contracts
Firm and size: why firms become larger?
- Firms become larger to gain monopoly, economics of scale, to rise supply prices
Cost curve slope and the size of the firm: what is the relationship?
- When the cost of production goes down and the volume of production goes up, there
are economies of scale.
2) An economist’s perspective on the theory of the firm, by Hart
What roles firms play in capitalism?
- Firms create growth (macroeconomy)
- The firm is a means of production
- It is meant for maximizing the profit/welfare of the owner
- Changes in the environment are exogenous to the firm
- Conflicts of interests between two parties
- information asymmetry, unobservability, risk aversion (by agents)
- Whenever the ‘principal’ (owner) has another ‘agent’ (manager) performs a service on
his behalf and cannot fully observe the agent’s action.
- So in order to make sure that the agent does what is in the principals’ interests and not
in the agent’s interests, incentives will be offered like salary + perks (bonuses)
Transaction cost theory
- Costs like thinking, planning, contracting are lower in some situation if the transaction is
carried out within the firm rather than in the market
- Contracting costs
- The main cost of transacting in the market is learning the terms of trade. These can be
reduced by given one party authority over the terms of trade.
- So the firm acts as a nexus of contracts
- The firm arises to economize transactions
Property rights approach to the firm
- ownership of assets
- possession of residual rights of control of assets
- shareholders control management
3) Production, information costs, and economic organization, by Alchian and Demsetz
Organization and firm
- Resource owners increase productivity through cooperative specialization and this leads
to the demand for economic organizations which facilitate cooperation.
- measured by the inputs (what you put in) and what comes out (outputs), productivity
- joint activity yields high productivity, market can monitor team productivity
- A style of management control. The combination in one company of two or more stages
of production normally operated by separate companies
Types of firms
- profit shares
- corporation, future returns -> stock owners, shareholders, voting power
- mutual/non profit firms
- partnership unions
- something resource that all firms share
- something unique that only a particular firm has and that other firms don’t
Study guide: the nature of the firm, by coase. A firm is an economic system that works by itself. Price is the central mechanism and entrepreneur as the coordinating factor. supply-demand, production-consumption. Motivation to be one"s own master and earn money/profit. The firm governs the direction of resources within the limits of these contracts. Firms become larger to gain monopoly, economics of scale, to rise supply prices. When the cost of production goes down and the volume of production goes up, there are economies of scale: an economist"s perspective on the theory of the firm, by hart. The firm is a means of production. Changes in the environment are exogenous to the firm. It is meant for maximizing the profit/welfare of the owner. Whenever the principal" (owner) has another agent" (manager) performs a service on information asymmetry, unobservability, risk aversion (by agents) his behalf and cannot fully observe the agent"s action.