Trends - rise in # of small businesses in the late 1980s
What can explain this phenomenon and is it a good or a bad thing for
society?
How do we define society? Depends on whether we look at it from
consumer/laborer/capitalist perspective.
What determines wages? Generally a question for a labor economics
class, but also relevant in looking at structure of economy.
w= f(unionization, firm size, human capital, sex, race)
Pros of small businesses:
No excess profit.
Better for consumers? - lower prices.
Max consumer and producer surplus - Allocatively efficient
Encourage innovation?
Create jobs?
better quality control?
Cons of small businesses:
Competition may mean workers don't get treated well.
High failure rate - jobs may be temporary.
Can these firms innovate?
Pros of large businesses:
Have higher profits and thus:
Tend to treat workers well.
Have money to innovate.
Returns to scale - May be able to pass on savings to consumers.
(Walmart)
Cons of large businesses:
Market power linked to higher prices and
wasteful advertising.
undue political influence!!
Incentive to innovate may disappear if too large.
Large firms transfer risks onto small producers (who in turn transfer
risks onto workers.)
Examples: apparel
cereal
restaurants
Is perfect competition 'natural'?
So how big is too big?
Are we a country of small or large firms? Depends on what #s you
use. There are many small firms, but they control very little of
the market. Then there are a few large firms who control most of the
market.
Is it possible to observe an increase in the number of large and small
firms simultaneously?
Yes, because there is a link between big and small business, since
large firms may outsource (as a way to reduce their risks and
costs.)
Perfect competition is not natural and may not even be desirable.
But neither is it desirable to allow large firms to be unregulated.
What we need is a vigilant government that allows large firms, but
makes sure they are closely monitored so both workers and consumers are
protected.
What's happened more recently in terms of small/large business
trends?
What is best way to measure market concentration?
What should role of government be?
Can we look at economics without looking at politics?