Efficiency and Transaction Costs in Business: The Role of Firms, Quizzes of Microeconomics

Download Efficiency and Transaction Costs in Business: The Role of Firms and more Quizzes Microeconomics in PDF only on Docsity! TERM 1 Why do Firms Exist? DEFINITION 1 Organizing activities through the hierarchy of the firm is usually more efficient than market exchange because production requires the coordination of many transactions among resource supplies TERM 2 Using a resource market requires... DEFINITION 2 1) the cost of determining what inputs are needed and how they should be combined2) the cost of reaching an agreement with each resource supplier over and above the direct costs of the labor required to make item in question TERM 3 As a result, we turn to firms when DEFINITION 3 The transaction costs are highex. we wouldn't hire a firm to paint our house if we could buy pain and paintbrushes ourselvesex. when building our house, we need a building contractor because its a lot harder TERM 4 Bottom Line DEFINITION 4 the more complicated the task is, the greater the ability to economize on transaction costs through specialization and centralized controlex. buying and assembled car rather than going through the 20,000 suppliers yourself TERM 5 In Summary: Firms... DEFINITION 5 minimize the transaction costs and the production costs of economic activity TERM 6 Vertical Integration DEFINITION 6 expansion of a firm into stages of production easier or later than those in which it specializesex. a steel company can go backwards by mining iron ore or go forward by fashioning steel into various components TERM 7 Outsourcing DEFINITION 7 When a firm by products from an outside supplier TERM 8 Core Competency DEFINITION 8 Area of specialty; the product or phase of production a firm supplies with greatest efficiency TERM 9 As a result of core competency DEFINITION 9 internal production (producing within a firm) or market purchases (purchasing items outside your firm) are alternate ways to minimize transactions TERM 10 Market prices and managers coordinate transactions between DEFINITION 10 market prices- between firmsmanagers- within firms TERM 21 Principal-agent problem DEFINITION 21 Arises from hidden actionsa relationship in which one party, the principal, contracts with another party, the agent, in expectation than the agent will act on behalf of the principal*the problem arises when the goals of the agent are incompatible with those of he principal and when the agent can pursue hidden actions TERM 22 Principal DEFINITION 22 a person or firm who hires an agent to act on behalf of that person or firm TERM 23 Agent DEFINITION 23 a person or firm who is supposed to act on behalf of the principal TERM 24 Moral Hazard DEFINITION 24 a situation in which one party, as a result of a contract, has an incentive to alter their in a way that harms the other party to the contract TERM 25 For most of us... DEFINITION 25 the process of gathering consumer information can be considered non market work TERM 26 Marginal Cost of Search DEFINITION 26 as your search widens, the marginal cost of information increases because you have to travel greater distances and spend more time. As a result, this is an increasing function. TERM 27 Marginal Benefit of Search DEFINITION 27 As you gather information and grow more acquainted with market, additional information yields less and less marginal benefit. As a result, this function is decreasing TERM 28 Optimal Search DEFINITION 28 Where marginal benefit equals marginal costs TERM 29 Implications DEFINITION 29 search cost (what we have been talking about the past 3 index cards) result in price dispersion, or different prices for the same productit also leads to quality differences across sellers, even identically priced products, because consumers find the expected marginal cost of finding a higher quality product outweighs the expected marginal benefit* new technology lowers price dispersion, earnings and the more expensive an item is increases the price dispersion TERM 30 Efficiency wage theory DEFINITION 30 the idea that offering high wages attracts a more talented labor pool and encourages those hired to perform well to keep their jobs TERM 31 signaling DEFINITION 31 using a proxy measure to communicate information about unobservable characteristics; the signal is more effective if more productive workers find it easier to send than less productive workers TERM 32 screening DEFINITION 32 the process used by employers to select the most qualified workers based on observable characteristics, such as a job applicants level of education and course grades TERM 33 behavioral economics DEFINITION 33 An approach that borrows insights from psychology to help explain economic choices TERM 34 Unbounded Rationality DEFINITION 34 we do nothing when facing a difficult decision TERM 35 Unbounded Willpower DEFINITION 35 we have complete control over something once we make a decision but we have little willpower to keep it up