[...]... costs have, without doubt, been a major reason that whales remain communal property and are threatened still with extinction Communal property rights can also have an effect on the way animals are treated and slaughtered Armen Alchian and Harold Demsetz have provided us with a vivid description of the seal slaughter in Canada: In 1970, the newspapers carried stories of the barbaric and cruel annual slaughter... issues are, we can’t avoid them, and managers would not get the pay they do if all such problems of “what counts” in the workplace were easily and readily solved Psychology will always be a part of management precisely because it helps identify workers’ likes and dislikes Economics will always be a part of management because it can guide managers in making money by instituting and adjusting on the margin... managers mainly because incentives are powerful—both when they are wrong as well as right, as we will see by taking up an array of incentive issues that range from how workers’ compensation can affect firm output to how a firm’s finances (debt and equity) can affect management risk taking and, hence, firm profitability Incentives are growing in importance as a tool of management for several important... for 3 papayas, both would be better off Fred will produce a coconut, giving up 2 papayas, but he can turn around and get 3 papayas for the coconut Hence, he is better off Harry can produce 4 papayas, giving up 1 coconut, and trade 3 of the papayas for a coconut He has the same number of coconuts, but has an additional papaya Harry is better off Although relatively simple, the above example of exchange... more batters in the American League have been hit than in the National League 34 We remind you that “hits” and “pats” on the back can be important ways of increasing firm profits However, there is a problem in talking about “hits” and “pats,” or any other nonmoney attribute of the work environment, that must be kept in mind: Are “hits” and “pats” goods (something workers want) or bads (something they... full range of potential incentives Unfortunately, we can’t say exactly what incentives your firm should employ The exact incentives chosen depend on local conditions that can vary greatly across firms You would not want us to write about particular incentives for your particular circumstances, mainly because we can be assured of only one constant fact about business: Particular circumstances will change... and how long and hard they work 31 But there is a far more fundamental reason that incentives matter: Managers don’t always know what orders or directives to give No matter how intelligent, hard working and well- informed managers are, they seldom know as much about particular jobs as those who are actually doing those jobs Knowing about the peculiarities of a machine, the difficulties a fellow worker... John W Pratt and Richard J Zeckhauser (Boston, Mass.: Harvard Business School Press, 1991), pp 187–12; and James A Robins, “Why and When Does Agency Theory Matter? A Critical Approach to the Role of Agency Theory in the Analysis of Organizational Control” (Irvine, Calif.: Graduate School of Management, University of California, Irvine, working paper, 1996) 32 Frederick Taylor, The Principles of Scientific... may attempt, in the jargon of economists, to acquire monopoly profits, and in so doing cause an underuse of the road 14 (A monopoly is a single seller of a good or service that can charge higher prices and reap greater profits than if it had to worry about the actions of other competitors.) For that matter, the state- imposed taxes may be greater than the social costs The state may also act like a. .. Economic Way of Thinking 27 paraphrase Gorbachev, amazing, unexpected things happen when people are given meaningful incentives to lay claims to the benefits of their actions Like most other universities, the University of California, Irvine, has graduate student apartments that are heavily subsidized That is to say, the rents charged for oncampus apartments are several hundred dollars lower than the . class="bi x0 y0 w0 h0" alt="" CHAPTER 1 Microeconomics, A Way of Thinking about Business In economics in particular, education seems to be largely a matter of unlearning and “disteaching”. analysis, maintaining all the while that there is, indeed, an “economic way of thinking that deserves mastering. We will also ask you to reconsider, in light of the new methods of thinking, old. application to business, given that firm sales are often affected by “macro variables” such as national income and the inflation rate. Throughout this Chapter 1. The Economic Way of Thinking