Microeconomics for MBAs 20. The Economic Way of Thinking for Managers. Microeconomics for MBAs develops the economic way of thinking through problems that MBA students will find relevant to their career goals. Maths is kept simple and the theory is illustrated with real-life scenarios | Chapter 6. Reasons for Firm Incentives 9 efforts. Such a finding means that if each worker added to the group must be paid the same as all others the cost of additional production obviously rises with the size of the working group. The finding also implies that to get a constant increase in effort with the additional workers all workers must be given greater incentive to hold to their previous level of Optimum Size Firms How large should a firm be Contrary to what might be thought the answer depends on more than economies of scale technically specified. Technology determines what might be possible but it doesn t determine what will happen. And what happens depends on policies that minimize shirking and maximize the use of the technology by workers. This means that scale economies depend as much or more on what happens within any given firm as they do on what is technologically possible. The size of the firm obviously depends on the extent to which owners must incur greater monitoring costs as they lose control with increases in the size of the firm and additional layers of hierarchy a point well developed by Oliver Williamson in his classic article written more than thirty years ago13 . However the size of the firm also depends on the cost of using the market. Management information Professors Vijay Gurbaxani and Seungjin Whang have devised a graphical means of illustrating the optimal firm size as the consequence of two forces internal coordinating costs and external coordinating costs. 14 As a firm expands its internal coordinating costs are likely to increase. This is because the firm s hierarchical pyramid will likely become larger with more and more decisions made at the top by managers who are further and further removed from the local information available to workers at the bottom of the pyramid. There is a need to process information up and down the pyramid. When the information goes up there are unavoidable problems and costs costs of .
