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ProducerEssay - Joaquin Effertz 11/9/07 ECON 106 The Pareto...

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Joaquin Effertz 11/9/07 ECON 106 The Pareto Efficiency of Mass Firings In March of 2007, Circuit City fired approximately 3,400 employees across the country. The decision was made based on the salary of those employees according to a payment rage determined for each position within each department 1 . The company made the decision in an attempt to cut costs, claiming the employees were “overpaid”. The fired employees made up about nine percent of Circuit City’s workforce, and consisted mostly of employees with many years of experience. Circuit City, like nearly every firm, is a profit-maximizing firm, and as such hoped to cut costs in order to increase profit. This decision illustrates the economic concepts of profit and Pareto efficiency, and is an excellent demonstration of the invisible hand theory. Profit is defined as revenue minus costs 2 . By firing its employees, Circuit City hoped to reduce costs more than it would reduce revenue by losing employee experience. As a profit- maximizing firm, Circuit City obviously believed that firing employees who were paid the most (usually the most experienced employees) would do so. Circuit City was at least partially justified in this belief, as it had cut costs by $130 million and increased profit with somewhat similar (but much smaller scale) firings in 2003. In addition, unlike in a perfectly competitive market, Circuit City had no reason to believe that the fired experienced employees would be snatched up by competitors, as Circuit City is one of the few large firms in the electronic retail market. A Washington Post article identified the main competitors in the electronic market during the holiday season of 2006 as Circuit City, Best Buy and Wal-Mart 3 . A market with only 1 The Washington Post , March 29 2007 2 Principles of Microeconomics , Third Edition 3 The Washington Post , March 29 2007
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three main, relatively large firms is clearly an Oligopoly. Though these three firms act as substitutes for one another, an American consumer would likely be hard-pressed to find a firm other than these three that sells goods such as big-screen TVs or high-definition DVD players. Circuit City believed that it could cut costs with its decision, and therefore likely intended
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ProducerEssay - Joaquin Effertz 11/9/07 ECON 106 The Pareto...

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