Economic approaches to organizations
1 – Markets and organizations
1.1 The economic problem
An economist would identify an economic problem in any situation where needs would not be met
as a result of scarcity of resources. What is the optimal allocation of the scare resources? Resources
that are optimally allocated are said to be used with efficiency. An economic aspect is whenever a
part of a problem deals with the (optimal) allocation of scarce resources. Econmic approaches to
organizations focus specifically on the economic problem of optimal allocation of scarce resources
(broadly conceived). The economic contribution to our understanding of an organizational problem
increases when the economic problem forms a greater part of the organizational problem that we
are trying to understand.
1.2 The division of labour
Adam Smith is seen of one of the founding fathers of modern economics. Division of labour refers to
the splitting of composite tasks into their component parts and having these performed separately.
People usually perform a small part of an entire organization’s task. The organization itself is split
into different parts, levels and functions. Therefore, we need organization charts.
1.3 Specialization
An increasing division of labour leads to greater productivity, and according to Smith a growth in ‘the
wealth of nations’. There can be said to be economies of specialization. Specialized production is
more efficient than unspecialized production. Due to specialization higher levels of performance can
be reached. Individual limits can be a boundary to specialization.
1.4 Coordination
Exchange has to take place. Goods and services are exchanged whenever the right to use them is
transferred. These exchange happens on a market. For an exchange to happen the products needs to
be marketable. The transfer of rights need not be mutual. When exchange takes place, we speak of
an transaction. How do the parties who are willing to engage in a transaction find each other? For
this to happen, there needs to be coordination. There are two types of coordination, it can either
take place across markets or within organizations.
1.5 Markets and organizations
On the market the price system is the coordinating device that takes care of allocation. When the
price contains all the information a buyer needs, it can be said to be a sufficient statistic. When there
are more potential buyers than sellers, the price goes up. Coase said there was a cost to using the
price system. First, there is a cost involved in finding out what the relevant prices are. Next, a
contract is usually drawn up to provide the basis for a market transaction. In Coase’s view, the
coordinating device on the market is the price system. The coordinating device within an
organization is the authority. Transactions will be made at the lowest costs. An ideal market is
characterized by the fact that prices act as sufficient statistics for individual decision making. Ideal
organizations can be characterized as all those forms of coordination of transactions that do not use
prices to communicate information between the transacting parties.
1 – Markets and organizations
1.1 The economic problem
An economist would identify an economic problem in any situation where needs would not be met
as a result of scarcity of resources. What is the optimal allocation of the scare resources? Resources
that are optimally allocated are said to be used with efficiency. An economic aspect is whenever a
part of a problem deals with the (optimal) allocation of scarce resources. Econmic approaches to
organizations focus specifically on the economic problem of optimal allocation of scarce resources
(broadly conceived). The economic contribution to our understanding of an organizational problem
increases when the economic problem forms a greater part of the organizational problem that we
are trying to understand.
1.2 The division of labour
Adam Smith is seen of one of the founding fathers of modern economics. Division of labour refers to
the splitting of composite tasks into their component parts and having these performed separately.
People usually perform a small part of an entire organization’s task. The organization itself is split
into different parts, levels and functions. Therefore, we need organization charts.
1.3 Specialization
An increasing division of labour leads to greater productivity, and according to Smith a growth in ‘the
wealth of nations’. There can be said to be economies of specialization. Specialized production is
more efficient than unspecialized production. Due to specialization higher levels of performance can
be reached. Individual limits can be a boundary to specialization.
1.4 Coordination
Exchange has to take place. Goods and services are exchanged whenever the right to use them is
transferred. These exchange happens on a market. For an exchange to happen the products needs to
be marketable. The transfer of rights need not be mutual. When exchange takes place, we speak of
an transaction. How do the parties who are willing to engage in a transaction find each other? For
this to happen, there needs to be coordination. There are two types of coordination, it can either
take place across markets or within organizations.
1.5 Markets and organizations
On the market the price system is the coordinating device that takes care of allocation. When the
price contains all the information a buyer needs, it can be said to be a sufficient statistic. When there
are more potential buyers than sellers, the price goes up. Coase said there was a cost to using the
price system. First, there is a cost involved in finding out what the relevant prices are. Next, a
contract is usually drawn up to provide the basis for a market transaction. In Coase’s view, the
coordinating device on the market is the price system. The coordinating device within an
organization is the authority. Transactions will be made at the lowest costs. An ideal market is
characterized by the fact that prices act as sufficient statistics for individual decision making. Ideal
organizations can be characterized as all those forms of coordination of transactions that do not use
prices to communicate information between the transacting parties.
