Econ Paper

Chapter 6 Summary

In Chapter 6, it focuses on two questions about the optimal way to acquire this efficient mix of inputs, and how the owners of a firm can ensure that workers put forth the maximum effort consistent with their capabilities. The first part of the chapter provides managers with the information needed to acquire a given set of inputs in the optimal manner and the second part of the chapter examines how a firm can ensure that labor inputs, including both managers and workers, put forth the maximum effort consistent with their capabilities. The second part is important because conflict of interest often arises among workers, managers, and the firm’s owners. Examples of this would be how managers may wish to spend firm’s resources of the office goods or supplies, whereas the owners would want the funds to be invested to increase profits. For the workers, as usual, they would want to spend more time gossiping in the lunchroom instead of working. A principal-agent problem exists when the employees and owners have conflicting interests. To make sure that all employees put forth their highest level of effort, this chapter will describe how manager and worker compensation plans can be constructed.

First part describes the methods of procuring inputs, where a manager can use several approaches to obtain the inputs needed to produce a final product. Managers will face several options to choose the one that minimizes costs for the company. There are three methods of acquiring inputs: purchase the inputs using spot exchange, acquire inputs under a contract and produce the inputs internally. Before we examine how to determine the best method of acquiring a given type of input, it is much useful to provide a broad overview of these three methods.

For the first method, it is about acquiring inputs using spot exchange. It occurs when the buyer and seller of the input meet, exchange, and then go their separate ways. Basically, it is an informal...