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

The most productive activity is carried out by firms as compared to individuals who contract mutually with one another,as the firms has the benefit of economies of scale,where they are able to minimize their production costs,thus helping cost saving.Firms also enjoy a larger comparative advantage in comparison to individuals contracts.

A firm is able to reduce costs by eliminating cost of negotiating and preparing separate contract for each individual transaction in the market.The individuals contracting mutually do not benefit from these advantages of a firm and hence the most productive activity is carried out by the firms.