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An informal relationship between a buyer and seller in which neighter party is obligated to adhere to specific terms for exchange. (common/frequent market price)
ex: Buy something at a store |
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A formal relationship between buyer and seller that obligates the buyer and seller to exchange at terms specified in a legal document.
Incomplete if: does not specifiy price to provide service no mentioned.
Disadvantages: costly to write, takes time and legal fees. Also, difficult to cover all the contingencies that can occur in future. |
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A situation where a firm produces the inputs required to make its final product.
Firm loses specialization. Firm also has to manage the production of inputs and production of final product. |
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Costs associated with acquiring an input that are in excess of the amount paid to the input supplier.
Include: cost of searching for supplier, costs of negotiating a price that input will be purchased and other investments and expenditures related to exchanging. |
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Definition
An expenditure that must be made to allow 2 parties to exchange but has little or no value in any alternative use.
Include nonrecoverable costs (es: machine to test only certain things) |
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| Relationship-Specific Exchange |
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Definition
A type of exchange that occurs when the parties to a trasnaction have made specialized investments.
2 parties are tied togoether because of the specific investments made to facilitate exchange. |
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Definition
Occurs when buyer and the seller of an input must locate their plants close to each other to be able to engage in exchange.
Ex: coal plants and electric power. |
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| Physical-Asset Specificity |
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Definition
Situation where the captial equipment need to produce an input is designed to meet the needs of a particular buyer & cannont be readily adapted to produce input needed by other buyers.
Ex: machines only specific to certain buyers |
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Definition
Investments made by a firm that allow it to exchange with a particular buyer.
Ex: Opens new line/building only useful if profitable = dedicated asset. |
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| Where workers learn specific skills to work for a particular firm. If not useful or trasnferable to other employees, then they are a specialized investment. |
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Specialized investments increase transaction costs.
The 2 parties in the realtionship specific exchange bargain with each other over a price at which the input will be bought and sold. Bargaining process is costly, because each side tries to get more favorable price. |
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You will not put in as much time/work if you expect to leave/quit job.
When specialized investments are required to facilitate exchange, lvel of specialized investment is lower than optimal level. |
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Definition
| Once a firm makes a specialized investment, the other party may attempt to "rob" it of is investment by taking advantage of the investment's sunk nature. Would make firms less reluctant to engage in realtionship-specific investments in the first place. |
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| Some executive offers receive stock options and other bonuses directly related to profits. If they get rid of these, profits may decline due to less performance-based work. |
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| Providing firms with options to managers to maximize profits. |
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| Great reputation = options to work for another firm, reputaion can be sold at a premium. Costs = long hours = excellent manager. |
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| Mangers will work harder if they have the threat of a new manager being potentially hired to inrease profits. |
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Mechanism used to enhance workers' efforts that invovles tying compenstaion to the underlying profitability of the firm.
An incentive to have workers work harder to receieve compensation. |
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Mechanism used to ehance workers' efforts that invovles linking compensation to the underlying revenues of the firm.
If they work harder, they benefit firm AND themselves. |
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Payment depends on output produced. Ex: type more, get paid more.
Problem: may attempt to produce quantity at the expense of quality. |
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| Time Clocks and Spot Checks |
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Definition
Time clocks do not monitor effort, just time.
Spot checks- the manager checks up on employee's work to see if it is satisfactory. |
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Definition
| The maximum amount of output that can be produced with a given set of inputs. |
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| Negative Marginal Returns |
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Definition
| Range of input usage over which marginal product is negative. |
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Definition
| The maximum level of output that can be produced with a given amount of inputs. |
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Term
| Leontief Production Function |
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Definition
| Assumes taht inpurts are used in fixed proportions. |
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Term
| Linear Production Function |
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Definition
| Assumes a perfect linear relationship between all inputs and total output. |
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Term
| Cobb-Douglas Production Function |
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Definition
| Assumes some degree of substitutablity among inputs. |
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Definition
Defines the combinations of inputs that yield the same level of output.
Any combo of K & L along isoquant will produce same level of output. |
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| Marginal Rate of Technical Substitution (MRTS) |
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Definition
| Rate at which a producer can substitute between 2 inputs and maintain the same level of output. |
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| A line that represents the combinations of inputs that will cost the producer the same amount of money. |
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| The cost of production an additional unit of output. |
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Definition
A cost that is forever lost after it has been paid.
Amount of fixed costs that cannot be recouped. |
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Definition
| Exist when LRAC delince as output is increased. |
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Term
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Definition
| Factors that affect managerial decisions which include # of firms competeting, size of firm, tech. costs and demand conditions. |
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Term
| Four-firm Concentration Ratio |
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Definition
| The fraction of total industry sales generated by 4 largest firms in industry. |
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Definition
| Sum of the squared market shares of firms in a given industry multiped by 10,000. |
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Definition
A measure of the sensitivity to price of a product group as a whole relative to the sensitivity of the quantity demanded of a single firm to change it's price.
Provides measure of how price sensitive a firm's demand is relative to whole market. |
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Definition
Measure of the difference between price and marginal cost as a fraction of the product's price.
A measure of how much firms in an industry mark up their prices over marginal cost. |
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Definition
| Situation where various stages in production of a single product are carried out in single firm. |
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Definition
Merging of the production of similar products into a single firm.
Reasons to engage include enjoying the cost of savings of economies of scale or scope and to enhance market power. |
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Definition
| Uniting productive resources. (Merger) |
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Definition
Invovles integration of different product lines into a single firm.
Final products are not related. |
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Term
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Definition
| Asserts market structure "causes" firms to behave in certain way = resources to be allocated in certain ways. |
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Definition
| Believe there is no one way causal link among structure, conduct and performance. |
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Definition
| Refers to the profits and social welfare that result in a given industry. |
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Term
| Dusby-Willig Performance Index |
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Definition
| Measures how much social welfare (sum of consumer & producer surplus) would improve if firms in an industry expanded output in a socially efficient manner. |
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