1. Markets and Organizations
● ‘wants’ can be unlimited, resources are always scarce
● To solve this problem: the science of choice (we need to take some things over others/
to sacrifice something - opportunity cost)
● The theory takes into account: individual satisfaction and efficiency
➢ Economic efficiency: efficiency means that resources are allocated optimally
○ Resources are optimally allocated when:
■ They’re directed to their most productive use; or
■ A given amount of production is achieved with a min. of resources
Resources:
= assets or services that meet the needs and wants of individuals
➢ Economic problem: when needs are not met because of the scarcity of resources
there’s a problem allocating scarce resources to the needs of people
○ Economics deals with the (optimal) allocation of scarce sources
➢ Optimal allocation: situation when resources are used efficiently
4 types of resources:
Land (natural resources)
Labour (human resources)
Capital (manmade resources)
Entrepreneurship, information (human resources)
→ money is not a resource
● Human resources are intangible (technological - managerial know-how)
○ Rights (Distribution agreements, financing arrangements, supply contract,
licenses, certifications, franchises)
○ Relationships (customer, trained workforce, distribution relationships)
○ intellectual property (trademarks, training programs, marketing strategies)
○ business knowledge (cost and pricing data)
Specialization leads to better performance and efficiency
● when work is split into specific tasks we may select one that particularly suits our own
capabilities
● specialization relies on the division of Labor (Adam Smith)
● implemented when tasks are divided between team members → development and
improvement
● no time is wasted e.g. on changing or putting different tools aside
● workers can concentrate better because they perform one concrete task and they can
measure their performance to a greater extent
,⇒ more efficiently
Division of labour:
○ increase the productivity → economy of specializations
○ improves productivity, more skilled → save costs leads to the economy of
specialization
○ splitting of tasks into their component parts & having these performed separately
→ it’s a natural phenomenon in human society
○ Specialization: is the cause but also the consequence of division
➢ When specializing: goal is to transact with each other to get our ‘wants’ or ‘needs’ →
we’re not able to produce that much on our own
○ Exchange of goods between to or more parties
○ Transactions give rise to the need for coordination (!)
division of labour → specialization → production
➔ This works to save costs while ensuring maximum production
➔ Carried forward through markets and organizations
division of labour → specialization → coordination
➢ How do we coordinate? Markets and organizations
Markets: an abstract space where parties engage in exchange of goods and services
● The actors meet on the market, and abstract space where parties engaged in exchange
● Parties can exchange goods by barter or by exchange for money
● Competitive feature of the market
○ At least two buyers and one seller; or
○ One buyer and two sellers
Ideal Market: Is where supply and demand meet to ensure maximum efficiency and price is a
sufficient statistic.
Price-mechanism as sufficient statistics
→ the customer does not need to know anything but the price to make the best decisions
economically
● happens very rarely
● therefore people have to come up with the concept of organizations which simplify the
market to participate and transactions in the least complicated way possible
, ● An ideal organization can be characterized as all those forms of coordination of
transactions that do not use price to communicate information between the transaction
parties
● organizations arise as solutions to information problems
Organizations are groups of legal persons with a particular purpose
● Organize these markets
● markets and organizations are two ideal types of cooperation
● markets used surprise system as the coordination device organization uses non price
system authority
● most transactions in the real world I am the form of hybrids
● outside the firm, price movements direct production, which is coordinated through a
series of exchange transactions on the market
● within a firm these market transactions are eliminated and in place of the complicated
market structure with exchange transactions we have an entrepreneur / coordinator who
directs production
● some certain marketing costs are saved
Coase nature of the firm:
● Market is not always efficient
● Various costs involved
● 4 reasons why we need firms
● Costs for using the price system (ideal market=abstract)
● Costs for finding out the relevant information (time-consuming)
● Costs for creating contracts
● Costs of bargaining and decision
● (policing and enforcement costs)
➔ Solution: Organizations (CEO, managers,... → authority carries forward those costs)
➔ Authority within the organizations gather information, bargain contracts and enforce
policies.
➔ Other internal costs however: organizational, infrastructure, contingency plans.
Problems from the Market are solved
➔ Costs are internalized
➔ Information asymmetry is solved
➔ Mitigate unforeseen circumstances
● A firm is essentially a device for creating long term contracts when short term contracts
are too bothersome to make
● Components of the firm:
○ being holistic in nature
, ○ having one mutual objective
○ operating in an environment of perfect information
○ dealing with actors that all want to maximize their profit
● Organizations are an alternative to markets (!) in coordinating transactions
➢ Organizations: the price system as coordination mechanism is replaced by authority
● Some transaction costs that appear in the market are internalized and thus reduced
○ Organizations replace markets to coordinate transactions as they offer a cheaper
alternative to the market organization
○ Besides authority: different theories over firms, why firms arise → key assets
may also decide how transactions may fall into an organizational coordinated
mechanism or a market coordinated mechanism
○ Organizations however produce transaction costs of their own
○ Transactions will shift between markets and organizations depending on the
transaction costs under the two alternatives
● What are organizational transaction costs? E.g. information costs
➢ There are key differences between markets and organizations → both are coordination
mechanisms for transactions
○ The market/organization mix depends on the particular information requirements
of the situation (!)
➢ Environment:
● Provides conditions for the creation of markets and organization
● Shapes organizations and markets by exerting social, economic, political pressures
● Ultime selection mechanisms for determining which organizations and markets survive
➢ Institutions:
○ Institutions are part of the environment
■ Formal and informal rules developed within the society
■ Any structure or mechanisms shaping the behaviour of individuals within
given society
○ Formal institutions and their enforcement expanded due to expansion of markets
■ Personal exchange become impersonal exchange
■ Impersonal exchange offered space to fraud and malevolent behaviour
■ Example: disclosure requirements of public companies
■ Online review rating system: when you read a review you have gained
more information about a product, so you don’t really have to know
anything about the seller
● ‘wants’ can be unlimited, resources are always scarce
● To solve this problem: the science of choice (we need to take some things over others/
to sacrifice something - opportunity cost)
● The theory takes into account: individual satisfaction and efficiency
➢ Economic efficiency: efficiency means that resources are allocated optimally
○ Resources are optimally allocated when:
■ They’re directed to their most productive use; or
■ A given amount of production is achieved with a min. of resources
Resources:
= assets or services that meet the needs and wants of individuals
➢ Economic problem: when needs are not met because of the scarcity of resources
there’s a problem allocating scarce resources to the needs of people
○ Economics deals with the (optimal) allocation of scarce sources
➢ Optimal allocation: situation when resources are used efficiently
4 types of resources:
Land (natural resources)
Labour (human resources)
Capital (manmade resources)
Entrepreneurship, information (human resources)
→ money is not a resource
● Human resources are intangible (technological - managerial know-how)
○ Rights (Distribution agreements, financing arrangements, supply contract,
licenses, certifications, franchises)
○ Relationships (customer, trained workforce, distribution relationships)
○ intellectual property (trademarks, training programs, marketing strategies)
○ business knowledge (cost and pricing data)
Specialization leads to better performance and efficiency
● when work is split into specific tasks we may select one that particularly suits our own
capabilities
● specialization relies on the division of Labor (Adam Smith)
● implemented when tasks are divided between team members → development and
improvement
● no time is wasted e.g. on changing or putting different tools aside
● workers can concentrate better because they perform one concrete task and they can
measure their performance to a greater extent
,⇒ more efficiently
Division of labour:
○ increase the productivity → economy of specializations
○ improves productivity, more skilled → save costs leads to the economy of
specialization
○ splitting of tasks into their component parts & having these performed separately
→ it’s a natural phenomenon in human society
○ Specialization: is the cause but also the consequence of division
➢ When specializing: goal is to transact with each other to get our ‘wants’ or ‘needs’ →
we’re not able to produce that much on our own
○ Exchange of goods between to or more parties
○ Transactions give rise to the need for coordination (!)
division of labour → specialization → production
➔ This works to save costs while ensuring maximum production
➔ Carried forward through markets and organizations
division of labour → specialization → coordination
➢ How do we coordinate? Markets and organizations
Markets: an abstract space where parties engage in exchange of goods and services
● The actors meet on the market, and abstract space where parties engaged in exchange
● Parties can exchange goods by barter or by exchange for money
● Competitive feature of the market
○ At least two buyers and one seller; or
○ One buyer and two sellers
Ideal Market: Is where supply and demand meet to ensure maximum efficiency and price is a
sufficient statistic.
Price-mechanism as sufficient statistics
→ the customer does not need to know anything but the price to make the best decisions
economically
● happens very rarely
● therefore people have to come up with the concept of organizations which simplify the
market to participate and transactions in the least complicated way possible
, ● An ideal organization can be characterized as all those forms of coordination of
transactions that do not use price to communicate information between the transaction
parties
● organizations arise as solutions to information problems
Organizations are groups of legal persons with a particular purpose
● Organize these markets
● markets and organizations are two ideal types of cooperation
● markets used surprise system as the coordination device organization uses non price
system authority
● most transactions in the real world I am the form of hybrids
● outside the firm, price movements direct production, which is coordinated through a
series of exchange transactions on the market
● within a firm these market transactions are eliminated and in place of the complicated
market structure with exchange transactions we have an entrepreneur / coordinator who
directs production
● some certain marketing costs are saved
Coase nature of the firm:
● Market is not always efficient
● Various costs involved
● 4 reasons why we need firms
● Costs for using the price system (ideal market=abstract)
● Costs for finding out the relevant information (time-consuming)
● Costs for creating contracts
● Costs of bargaining and decision
● (policing and enforcement costs)
➔ Solution: Organizations (CEO, managers,... → authority carries forward those costs)
➔ Authority within the organizations gather information, bargain contracts and enforce
policies.
➔ Other internal costs however: organizational, infrastructure, contingency plans.
Problems from the Market are solved
➔ Costs are internalized
➔ Information asymmetry is solved
➔ Mitigate unforeseen circumstances
● A firm is essentially a device for creating long term contracts when short term contracts
are too bothersome to make
● Components of the firm:
○ being holistic in nature
, ○ having one mutual objective
○ operating in an environment of perfect information
○ dealing with actors that all want to maximize their profit
● Organizations are an alternative to markets (!) in coordinating transactions
➢ Organizations: the price system as coordination mechanism is replaced by authority
● Some transaction costs that appear in the market are internalized and thus reduced
○ Organizations replace markets to coordinate transactions as they offer a cheaper
alternative to the market organization
○ Besides authority: different theories over firms, why firms arise → key assets
may also decide how transactions may fall into an organizational coordinated
mechanism or a market coordinated mechanism
○ Organizations however produce transaction costs of their own
○ Transactions will shift between markets and organizations depending on the
transaction costs under the two alternatives
● What are organizational transaction costs? E.g. information costs
➢ There are key differences between markets and organizations → both are coordination
mechanisms for transactions
○ The market/organization mix depends on the particular information requirements
of the situation (!)
➢ Environment:
● Provides conditions for the creation of markets and organization
● Shapes organizations and markets by exerting social, economic, political pressures
● Ultime selection mechanisms for determining which organizations and markets survive
➢ Institutions:
○ Institutions are part of the environment
■ Formal and informal rules developed within the society
■ Any structure or mechanisms shaping the behaviour of individuals within
given society
○ Formal institutions and their enforcement expanded due to expansion of markets
■ Personal exchange become impersonal exchange
■ Impersonal exchange offered space to fraud and malevolent behaviour
■ Example: disclosure requirements of public companies
■ Online review rating system: when you read a review you have gained
more information about a product, so you don’t really have to know
anything about the seller
