BASIC MICROECONOMIC FINALS
INSIDE THE FIRM
1. INTRODUCTION
In this chapter, we examine the firm more
closely. We will examine reasons firms
exist, as well as how the corporate form of
ownership affects firm decision making.
Finally, an important issue facing
stockholders as well as policy makers is
discussed--corporate takeovers.
II. OUTLINE
1. The Rationale for the Firm and the
Scope of Its Operation--The theory of the
firm used to this point has neglected
several important issues, such as why
firms exist and how managers make
decisions under conditions of uncertainty.
1.1 The Firm Reduces Transaction
Costs--Ronald Coase and the Nature of
the Firm.
a. There are costs involved in using
markets to make transactions.
b. Some activities can be performed
at less cost within the firm.
c. c. Firms exist as a way to minimize
both the transactions and the
production costs of economic
activity.
1.2 Shirking and the Entrepreneur
a. When production is complex,
teams of workers can produce
more in cooperation than by
working separately.
b. The contribution of each worker
cannot be observed directly in
team production.
c. If it is not possible to keep track of
each worker's contribution,
compensation is made on the basis
of the team's performance rather
than the individual's performance.
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d. Individual members of the team
have an incentive to shirk in their
efforts.
e. A monitor can be used to check
the productivity of the workers and
control the shirking. But, who
monitors the monitor?
f. The monitor who gets to keep the
difference between total revenues
and total costs will not shirk. The
monitor is the entrepreneur who is
ultimately responsible for the
decision- making in the firm.
1.3 The Scope of the Firm
a. Vertical integration--expansion of a firm
into earlier or later stages of production.
b. Bounded rationality--a manager
understands only a limited amount of
information.

2. Contestability
a. A contestable market in one in which it
is easy for firms to enter
b. Firm a in contestable markets do not
earn profits in the long run even If there
are not many Firma In the Industry.
c. Contestable markets exist when entry
barriers are low and assets not irreversible.
3. Corporate Ownership and Control
3.1 Managerial Behavior in Large
Corporations
a. The ownership of large corporations is
distributed among many stockholders. the
manager.
b. No single stockholder has the incentive
or ability to control
c. Some economists wonder whether
firms perform differently when operated
by professional managers rather than
owner- entrepreneurs.
d. Managers may promote their own goals
rather than those of the stockholders.
BASIC MICROECONOMIC FINALS
3.2 Constraints on Managerial Discretion
a. Competition in the marketplace
forces managers to maximize
profits in order to survive.
b. Managers' compensation are often
tied to the performance of the firm.
c. Dissatisfied stockholders can sell
their shares. If enough do this, the
price of the stock falls making it
easier for corporate raiders to take
over the firm.
3.3 The Market for Corporate Control
a. Many economists believe that the
market for corporate control
allocates corporate assets to those
who value them the most highly.
b. However, the market may not work
smoothly for several reasons:
(1) Outsiders have a difficult time
determining whether a firm is run
efficiently or not.
(2) Once an entrepreneur identifies
a takeover target, it is hard to keep
it a secret.
3.4 A Glossary of Takeover Terms
a. Golden Parachutes--provisions
that provide lavish payments to
incumbent managers if they are
fired due to a takeover.
b. White Knight--a firm that agrees to
take over a firm that is facing a
takeover threat from a raider.
c. Greenmail--premium paid by the
target firm to buy back its own
shares from a potential raider.
d. Junk Bonds--bonds used to
finance a takeover.
e. Poison Pills--actions taken by
management of the target firm to
make it less attractive to potential
raiders.
 mas better kesa sa isang company since
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INSIDE THE GOVERNMENT
I. INTRODUCTION
This chapter examines the role of
government more closely. Up until now,
the government has been treated as an
economic agent that stepped into the
marketplace to correct deficiencies in the
marketplace. Now, the decision- making
process used in government is examined,
as well as the distortions the government
can introduce into the economy.
Notes: consumer-households
producers-business
II. OUTLINE
1. The Economy as a Game--a market
economy often needs a third party to
resolve disputes. The government
specifies the rules and enforces the rules.
Halimbawa po kasi, ung economy po as a
game where people buy and sell things
po. Sometimes po ung mga businesses
might disagree or magkaroon ng problem.
So don po papasok ung government
kumbaga parang sila po ung referee ng
game, since ung gov nagsspecifies ng
rules and to make sure na everyone plays
fair and resolve conflicts po.
1.1 Fairness of the Game
a. Are the rules of the game fair to all
involved?
It supposedly to be fair for
everyone. Since yung gov. Tries to make
sure na yung rules is fair sa lahat ng
business, and walang papaboran. Parang
dapat sure na lahat ay may fair chance
para nag-succeed.
b. Is the outcome of the game fair?
Yung goal po is to make the
outcome fair, pero syempre hindi laging
perfect. Kasi merong mga company na
BASIC MICROECONOMIC FINALS
merong different reason like skills, luck
and advantages.
1.2 Kinds of Games
a.There are three kinds of games.
(1) Positive-sum games, where the
winnings exceed the losses.
Ito naman yung, kung saan ung
company and people trade or work
together, kumbaga nagkakaroon ng
collaboration kung saan magbebenefit
yung lahat.
Notes:
Fair and justice. Voluntary.
2.1 Median-Voter Model--majority voting
delegates the choice to the person whose
preference is the median of the group.
2.2 Logrolling
Logrolling occurs when voters trade
support for one issue in return for support
on another issue.
b. The choice of the median voter may not
prevail if logrolling exists.
2.3 Cyclical Majority--In some cases,
there may be no clear majority.

(2)Zero-sum games, where the winnings

exactly equal the losses.
It means if someone gets a bigger
slice, someone else gets a smaller one.

(3) Negative-sum games, where the

winnings are less than the losses.

b. Market transactions are generally

positive-sum games since they are
voluntary.

1.3 Rules and Behavior

a.Rules and rule changes can affect the
way the game is played.

B. Rules also affect the distribution of

income. Apektado ung producer profit and
consumers.

C. The rules that affect the distribution of

income also affect the incentives people
face.

2. Public Choice in Direct Democracy

Public Choice - lahat tayo gobyerno,
member ng gobyerno.

Economism - communism capitalism -

democratic
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