The Firm
Firm: An entity which produces goods for sale in a market
- Employs people to work for it
- use inputs to produce outputs through t he process of production in such a way so as to try
make pro ts
Two ways to coordinate labour:
1. Through the market mechanism - power is decentralised
2. Through rms -concentration of power= issue commands
Division of labour in a rm:
- The owners of the rm will issue instructions to their managers
- managers issue instructions to the workers
Asymmetric Information: Information that you know about your
behaviour that the person higher up then you does not know.
Contract: A legal document or understanding that speci ed a set
of actions that parties involved in the transaction governed by the
contract must undertake.
- contact over products = markets = permanently transfer
ownership
- contracts over labour = rms = temporarily transfer authority over a worker’s time to their
employer
Firms Speci c Asset: Those assets that are only valuable to the worker while they remain
employed at the rm
Separation of ownership and control: Owner of the business is no longer the person who is in
control of the day to day business.
Principle Agent Problem: One where a principle (owner) hires an agent (manager) to act on their
behalf, but the agent’s interest do not align with those of the principle.
Incomplete Contracts: They do not capture absolutely everything about a job in them
1. Information being unveri able = relevant information must be observed by all parties +
veri able my an impartial third party (court of law/ independent assessor)
e.g. certain damage to an apartment = whose fault the damage was
2. Time and uncertainty = contract enacted over a period of time. Cant anticipate everything that
could possibly go wrong and put it into a contract.
e.g. COVID-19
3. Measurement = battle to come up with an objective standard to measure someone’s
performance against.
e.g. what is good service at a restaurant?
4. Absence of judiciary = if there is nobody around to enforce a contract, then you can’t enforce
the contract
e.g. international contracts
5. Preferences = could write up a complete contract, but you actually don’t want to.
e.g. don’t want to know the songs that Coldplay will play at a concert before you go
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Firm: An entity which produces goods for sale in a market
- Employs people to work for it
- use inputs to produce outputs through t he process of production in such a way so as to try
make pro ts
Two ways to coordinate labour:
1. Through the market mechanism - power is decentralised
2. Through rms -concentration of power= issue commands
Division of labour in a rm:
- The owners of the rm will issue instructions to their managers
- managers issue instructions to the workers
Asymmetric Information: Information that you know about your
behaviour that the person higher up then you does not know.
Contract: A legal document or understanding that speci ed a set
of actions that parties involved in the transaction governed by the
contract must undertake.
- contact over products = markets = permanently transfer
ownership
- contracts over labour = rms = temporarily transfer authority over a worker’s time to their
employer
Firms Speci c Asset: Those assets that are only valuable to the worker while they remain
employed at the rm
Separation of ownership and control: Owner of the business is no longer the person who is in
control of the day to day business.
Principle Agent Problem: One where a principle (owner) hires an agent (manager) to act on their
behalf, but the agent’s interest do not align with those of the principle.
Incomplete Contracts: They do not capture absolutely everything about a job in them
1. Information being unveri able = relevant information must be observed by all parties +
veri able my an impartial third party (court of law/ independent assessor)
e.g. certain damage to an apartment = whose fault the damage was
2. Time and uncertainty = contract enacted over a period of time. Cant anticipate everything that
could possibly go wrong and put it into a contract.
e.g. COVID-19
3. Measurement = battle to come up with an objective standard to measure someone’s
performance against.
e.g. what is good service at a restaurant?
4. Absence of judiciary = if there is nobody around to enforce a contract, then you can’t enforce
the contract
e.g. international contracts
5. Preferences = could write up a complete contract, but you actually don’t want to.
e.g. don’t want to know the songs that Coldplay will play at a concert before you go
fi
fifi fi fi fi fi fi fi fi
