Chapter 1
Introduction to market and organizations
Course overview:
● The problem of economic efficiency & organizational responses:
● When should firms produce goods internally and when should they source goods via the
market?
● How can organizations increase their economic efficiency?
● Several economic theories that help to understand specific organizational issues:
● What are the critical dimensions of transactions and how do they help us to understand
risk (Transaction cost theory)?
● What are the main organizational challenges facing hybrid firms, and how do we resolve
them?
● What are common problems that arise within cooperations (e.g., managers and
shareholders) and how can those issues be resolved (Agency theory)?
● How can corporate governance approaches be used to address agency risks between
managers and shareholders?
Part 1: Introduction to Market and Organizations
● The economic problem:” The scarcity of resources”
,Economic efficiency:
● Efficiency means that resources are allocated optimally.
● Resources are optimally allocates when:
● They are directed to their most productive use;or
● A given amount of production is achieved with a minimum of resources
●
,Economic inefficiency: Labor & the organization
• Lower productivity, inefficient use of capital, task productivity.
Mintzberg: Efficiency can be derived in several ways
Division of labor, Specialization & Effective coordination. Labour
Division of labor:
● Splitting of tasks into their component parts and having these performed separately
● Natural phenomenon in human society
Division of labor ( adam smith & the pin factory)
A workman not educated to thıs business
Specialization:
Is the cause but also the consequence of division
Why does division of labor lead to increases in productivity?
Coordination:
Theory: Coase (1937)
The market and the firm are two alternative methods of coordinating production.
● The starting point of the analysis is the transaction.
Size of the organization =# transaction within the organization
● The question is always: does an extra ?
Transaction cost:
Steps ( market) transactions
1. Finding a party -> ‘ search cost’
● Unique goods vs. standarlized goods
● Information problems
2. Negotiations -> negotiation costs
● Number of parties
● Information problems
● Incomplete contracts
3. Maintain Agreements
Coordinating transactions:
Type 1: the market
, ● Price mechanism ( sufficient statistic)
● Disadvantages : costs of searching for a market party & negotiating, contract costs,
identifying contract options(?)
Type 2: The organization
Authority (Ronald Coase)
• Disadvantages: explanation is not sufficient; only in small business organizations is direct
supervision the dominant coordination mechanism.
Type 1: The market and the price mechanism
- Supply & Demand
● Law of demand: Dernand decreases if price incrementand vice versa)
● Law of supply: Supply increases of prices increases (and vice versa)
→Market price is determined by the intersection Insible hand (self regulating effect via pries
signal)
In short: price determines the activities of buyers and sellers in the market
Type 2: the organization
- The price system as a coordination mechanism is replaced by authority.
- Some transaction costs that appear in the market are internalized and thus reduced.
- Organizations however produce transaction costs of their own.
- Transactions will shift between markets and organizations depending on the transaction
costs under the two alternatives
- The conceptual framework begins to take shape:
- There are key differences between markets and organizations
- Both are coordination mechanism for transactions
- The market / organization mix also depends on the particular information.
Introduction to market and organizations
Course overview:
● The problem of economic efficiency & organizational responses:
● When should firms produce goods internally and when should they source goods via the
market?
● How can organizations increase their economic efficiency?
● Several economic theories that help to understand specific organizational issues:
● What are the critical dimensions of transactions and how do they help us to understand
risk (Transaction cost theory)?
● What are the main organizational challenges facing hybrid firms, and how do we resolve
them?
● What are common problems that arise within cooperations (e.g., managers and
shareholders) and how can those issues be resolved (Agency theory)?
● How can corporate governance approaches be used to address agency risks between
managers and shareholders?
Part 1: Introduction to Market and Organizations
● The economic problem:” The scarcity of resources”
,Economic efficiency:
● Efficiency means that resources are allocated optimally.
● Resources are optimally allocates when:
● They are directed to their most productive use;or
● A given amount of production is achieved with a minimum of resources
●
,Economic inefficiency: Labor & the organization
• Lower productivity, inefficient use of capital, task productivity.
Mintzberg: Efficiency can be derived in several ways
Division of labor, Specialization & Effective coordination. Labour
Division of labor:
● Splitting of tasks into their component parts and having these performed separately
● Natural phenomenon in human society
Division of labor ( adam smith & the pin factory)
A workman not educated to thıs business
Specialization:
Is the cause but also the consequence of division
Why does division of labor lead to increases in productivity?
Coordination:
Theory: Coase (1937)
The market and the firm are two alternative methods of coordinating production.
● The starting point of the analysis is the transaction.
Size of the organization =# transaction within the organization
● The question is always: does an extra ?
Transaction cost:
Steps ( market) transactions
1. Finding a party -> ‘ search cost’
● Unique goods vs. standarlized goods
● Information problems
2. Negotiations -> negotiation costs
● Number of parties
● Information problems
● Incomplete contracts
3. Maintain Agreements
Coordinating transactions:
Type 1: the market
, ● Price mechanism ( sufficient statistic)
● Disadvantages : costs of searching for a market party & negotiating, contract costs,
identifying contract options(?)
Type 2: The organization
Authority (Ronald Coase)
• Disadvantages: explanation is not sufficient; only in small business organizations is direct
supervision the dominant coordination mechanism.
Type 1: The market and the price mechanism
- Supply & Demand
● Law of demand: Dernand decreases if price incrementand vice versa)
● Law of supply: Supply increases of prices increases (and vice versa)
→Market price is determined by the intersection Insible hand (self regulating effect via pries
signal)
In short: price determines the activities of buyers and sellers in the market
Type 2: the organization
- The price system as a coordination mechanism is replaced by authority.
- Some transaction costs that appear in the market are internalized and thus reduced.
- Organizations however produce transaction costs of their own.
- Transactions will shift between markets and organizations depending on the transaction
costs under the two alternatives
- The conceptual framework begins to take shape:
- There are key differences between markets and organizations
- Both are coordination mechanism for transactions
- The market / organization mix also depends on the particular information.
