Question

Provide economic explanations for the following:

1.Why is most productive activity carried out by firms rather than by individuals who contract mutually with one another?

2. What influences the boundaries of the firm?

3. As islands of centralized planning, how do firms deal with Hayek’s knowledge problem critique of attempts to centrally plan economic activity?

4. Explain the problems of monitoring and metering employee productivity. How do firms overcome these issues?

Answer 1

1. Every firms have its own responsibility of adopting new techniques of maximization of windfall profits. But this can be achieved only when the entrepreneurs wants to allocate the resource in the optimum way. It refers to the good decision of all firms mutually creating the agreement between all the firms by enjoying the both internal and external economies of the scale. Such economies refers to sharing of power resources, water resources, raw materials quantity and also sharing the information of newly productive techniques. But when the individual executive of one firm runs the production without making any mutual agreement will get a chance of facing the problem of getting benefits form the economies of the scale.  

2. A. The boundaries of the firm are generally determined by the objectives of winning the all types of markets prevailing in the current situation. Such markets includes perfect competition, monopoly and oligopoly, etc. The decision making process of all business executives coupled with skills, use of skilled laborers, Application of innovative techniques, Using and allocation of funds in every productive steps and following the rules of economies of scale in the productive techniques and nature and the demand for the products are referred as factors which influences significantly the boundaries of the firm.

3. Centralized planning refers to the application of command economy by the government taking sole responsibility of fixing the price according to the demand for all the products, It actually prefers giving importance to investments and income earning procedures in the mixed economy of capitalist and mixed economies. Centralized planning controls the total means of production of goods and services. The above mentioned ideas was framed by Hayek. This was actually followed in soviet union, cuba and south korea. But though some economists critically evaluated the objectives of the Hayek in the form of cutting own ideas of the business firms, it was widely used during emergency periods in the countries And also it was widely used in the War periods.   

4. All the firms generally faces the problems of monitoring and metering the employees. If the firms does not follows the act of encouraging the employees by giving maximum incentives, the productive capacity of each employees will decrease which in turn effects the volume of the sales. Discouraging employees and existence of situation of employees when they feel insecurity in the firms. Such discomfort will also reduce the work interest and also reduce the skills of employed skills. The problem of issue can be overcome by following methods. Firms can conduct one-to-one session for each employees in order to record their own problems and also can be recorded in their minute books and try to solve one by one in all stages of workers style in the production. Secondly they can declare bonus percentage with huge rate and allocating incentives on every quarter when the firms earns windfall profits. They can also provide incentives according to the profit earned by the companies.