Holt 7525-9 S15_IT

Wal-Mart Corporation, the largest retailer in the world, exists primarily because it is able to reduce
transaction costs. Wal-Mart uses its efficient distribution system to make products from all over
the world conveniently (and inexpensively) available to the local consumer.
Firms and Team Production
The efficiency advantage that firms have over household production may occur because team
production is more productive than individual production. Productivity is measured by output per
unit of input.
Example 3: One worker can produce 3 widgets in an hour. The productivity of the one worker is 3
widgets per labor/hour. A team of 10 workers can produce 100 widgets in an hour. The
productivity of the team is 10 widgets per labor/hour. In this example, team production is more
productive than individual production.
Team production allows for two advantages over individual production:
1. Specialization of labor. In individual production, the individual must attempt to master every
step in the production process. In team production, each worker may be able to specialize in a
specific task. Each worker may become very skilled and productive at his or her specific task.
Example 4: Jeff is hired to work in a refrigerator assembly plant. Jeff’s job on the assembly line is
installing the back wheels on each refrigerator. Jeff doesn’t have to learn how to assemble an
entire refrigerator, and can quickly learn to do his specific task very efficiently.
Adam Smith discussed the importance of specialization (division) of labor in Book 1 of “The
Wealth of Nations”. See the appendix at the end of this chapter.
2. Extensive use of capital. Team production may allow for the use of large amounts of highly
specialized and highly productive capital. A large assembly plant may include hundreds of
millions of dollars worth of capital, making the team of workers employed at the plant highly
productive.
Example 5: Juanita is planning a formal dinner party for 40 people. Though Juanita normally
does her own cooking, she decides that her kitchen is not equipped for the preparation of such a
large and elaborate meal. So Juanita hires a catering firm to prepare the meal. The catering firm
has a very large, well-equipped kitchen.
Shirking in Team Production
In individual production, if an individual is less productive than he or she could be, that individual
suffers the consequences. Thus, the individual producer is motivated to be as productive as
possible. But individuals employed as part of a team don’t always have this motivation.
Individuals employed as part of a team may be motivated to avoid their obligations as part of the
team.
Example 6: Meg is assigned an individual research report for her Economics class. She works
diligently on the report (an analysis of the causes of high textbook prices) and earns a grade of A.
Meg is also assigned to a team to prepare a group research project in her Sociology class. Meg
calculates that the rest of the team will prepare an adequate report, even if she doesn’t participate
in preparing the report. Meg devotes her time to her other classes. The team (including Meg)
receives a grade of B for the report. Meg has engaged in shirking.
FOR REVIEW ONLY - NOT FOR DISTRIBUTION
Shirking – avoiding the performance of an obligation.
An employee who engages in shirking may still benefit from the other team members’ production.
The shirking employee may be motivated to engage in activities beneficial to themselves rather
The Firm 19 - 2