Summary Economic Approaches
For the midterm
Contents
Chapter 1 – Markets and organizations ...............................................................................................2
Chapter 2 – Markets............................................................................................................................2
Chapter 3 – Organizations ..................................................................................................................3
Chapter 4 – Information ......................................................................................................................4
Chapter 5 – Game theory ....................................................................................................................5
Chapter 6 – Econs and humans ..........................................................................................................7
Chapter 7 – Behavioural theory of the firm...........................................................................................8
, Chapter 1 – Markets and organizations
There is an economic problem if needs are not met as a result of
scarcity resources. We try to use the resources with efficiency and in
the optimal allocation. Economic approaches to organizations are
fruitful whenever the problem to be studied has an economic aspect.
1. Division of labour. Productivity increases if the labour is divided.
2. Specialization. Specialized production is more efficient than unspecialized production. You can select a
task that suits your needs and capabilities. For an individual, specialization results in higher performance
but also in restricted choice; the range of activities shouldn’t become too narrow.
3. Coordination. Exchange has to take place and is beneficial to both parties. Exchange results in a
transaction, which can take place either across markets or within organizations. Coordination is needed.
4. Markets and organizations. In an ideal market (e.g. stock market), the price system is the coordinating
device that takes care of allocation, no personal contact is needed. The price contains all the information you
need to base your transaction on: it is a sufficient statistic. However, usually, there is a cost to find out the
relevant prices and a contract is drawn up, which results in transaction costs economics. Ideal organizations
are all forms of coordination of transactions that do not use prices to communicate information between the
transacting parties.
5. Information. The price does not always include all information, as a result, organizations arise as solutions
to information problems. Information and communication costs determine the relative effectiveness of
markets and organizations.
6. Environment and institutions. The environment is the context in which trade-offs are made. The
environment provides conditions for organization/markets to be created, shapes all organizations/markets by
economic, social and political pressures and is the ultimate selection mechanism for determining which
organizations/markets can be successful and survive. Markets are influenced by the government (important
actor in the environment). Institutions are the rules of the game in a society; the humanly devised
constraints that shape human interaction. The government often regulates markets, e.g. the legal system.
Until recently, economists mostly studied coordination between or within organizations.
Chapter 2 – Markets
There is demand and supply for goods or services and a market can match demand
and supply at a certain price. How much companies are going to produce and how
much consumers are going to consume, results in the process of market interaction,
which determines the price. The law of demand assumes that total demand goes
down if the price goes up. The law of supply assumes that supply goes up as the
price goes up. Market equilibrium occurs if the two curves intersect. If there is an
increase in demand, the curve will shift upwards and the price will increase.
The preference rankings for products are assumed to
be transitive (if you prefer A over B and B over C,
you also prefer A over C). Preferences can be
presented with indifferences curves. Offer 120 for 120
is preferred because the green curve is further away
from the origin than the black curve. The satisfaction
consumers derive from having a good is called
utility. The budget line (blue line) shows the quantity
that can be bought with a certain budget. If you want
to maximize your utility, you should choose the offer
with the red dot, which is tangential to curve 1.
The promotion function describes the relationship between any combination of inputs (Capital (K) and Labour
(L) and the quantity of output that the firm can produce with those inputs: Quantity (Q) = Q(K, L). A company
calculates the optimate values to maximize their profits.
A firm can earn no economic profit in the long run in a competitive market (many sellers/buyers and free
entry/exit), because if there is economic profits, entry occurs, supply increase, price goes down and economic
profits vanish. A Pareto-optimal allocation of resources is that no one can be better off by changing the
allocation of resources without anyone becoming worse off.
For the midterm
Contents
Chapter 1 – Markets and organizations ...............................................................................................2
Chapter 2 – Markets............................................................................................................................2
Chapter 3 – Organizations ..................................................................................................................3
Chapter 4 – Information ......................................................................................................................4
Chapter 5 – Game theory ....................................................................................................................5
Chapter 6 – Econs and humans ..........................................................................................................7
Chapter 7 – Behavioural theory of the firm...........................................................................................8
, Chapter 1 – Markets and organizations
There is an economic problem if needs are not met as a result of
scarcity resources. We try to use the resources with efficiency and in
the optimal allocation. Economic approaches to organizations are
fruitful whenever the problem to be studied has an economic aspect.
1. Division of labour. Productivity increases if the labour is divided.
2. Specialization. Specialized production is more efficient than unspecialized production. You can select a
task that suits your needs and capabilities. For an individual, specialization results in higher performance
but also in restricted choice; the range of activities shouldn’t become too narrow.
3. Coordination. Exchange has to take place and is beneficial to both parties. Exchange results in a
transaction, which can take place either across markets or within organizations. Coordination is needed.
4. Markets and organizations. In an ideal market (e.g. stock market), the price system is the coordinating
device that takes care of allocation, no personal contact is needed. The price contains all the information you
need to base your transaction on: it is a sufficient statistic. However, usually, there is a cost to find out the
relevant prices and a contract is drawn up, which results in transaction costs economics. Ideal organizations
are all forms of coordination of transactions that do not use prices to communicate information between the
transacting parties.
5. Information. The price does not always include all information, as a result, organizations arise as solutions
to information problems. Information and communication costs determine the relative effectiveness of
markets and organizations.
6. Environment and institutions. The environment is the context in which trade-offs are made. The
environment provides conditions for organization/markets to be created, shapes all organizations/markets by
economic, social and political pressures and is the ultimate selection mechanism for determining which
organizations/markets can be successful and survive. Markets are influenced by the government (important
actor in the environment). Institutions are the rules of the game in a society; the humanly devised
constraints that shape human interaction. The government often regulates markets, e.g. the legal system.
Until recently, economists mostly studied coordination between or within organizations.
Chapter 2 – Markets
There is demand and supply for goods or services and a market can match demand
and supply at a certain price. How much companies are going to produce and how
much consumers are going to consume, results in the process of market interaction,
which determines the price. The law of demand assumes that total demand goes
down if the price goes up. The law of supply assumes that supply goes up as the
price goes up. Market equilibrium occurs if the two curves intersect. If there is an
increase in demand, the curve will shift upwards and the price will increase.
The preference rankings for products are assumed to
be transitive (if you prefer A over B and B over C,
you also prefer A over C). Preferences can be
presented with indifferences curves. Offer 120 for 120
is preferred because the green curve is further away
from the origin than the black curve. The satisfaction
consumers derive from having a good is called
utility. The budget line (blue line) shows the quantity
that can be bought with a certain budget. If you want
to maximize your utility, you should choose the offer
with the red dot, which is tangential to curve 1.
The promotion function describes the relationship between any combination of inputs (Capital (K) and Labour
(L) and the quantity of output that the firm can produce with those inputs: Quantity (Q) = Q(K, L). A company
calculates the optimate values to maximize their profits.
A firm can earn no economic profit in the long run in a competitive market (many sellers/buyers and free
entry/exit), because if there is economic profits, entry occurs, supply increase, price goes down and economic
profits vanish. A Pareto-optimal allocation of resources is that no one can be better off by changing the
allocation of resources without anyone becoming worse off.
