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Economics of Markets and Organizations Week 1 Summary
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Economics of Markets and Organizations Week 1 Summary including readings
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Week 1:Preparation: Chap 1: Organizations and
efficiency
Functioning organizations and markets re judge by their efficiency.
An allocation of goods and services is Efficient (or Pareto optimal) if no
reallocation of goods and services exists that makes somebody better off without
making someone else worse off.
The value maximization principle: An allocation of goods and services is efficient
(only) if it maximizes the total value among the affected agents.
Value = Welfare (Consumer Surplus + Producer Surplus).
PS = π = Q(p – c)
Welfare is maximized for p = MC
Ways of channeling information to achieve an efficient allocation:
- Centralization: Individuals communicate their information to a central
planner who makes all relevant decisions.
- Decentralization: Individuals make independent decisions on the basis of
prices of goods and services.
Arrow and Debreu’s general equilibrium model: assume that each producer
maximizes his own profits while each other consumer maximizes his utility at
prevailing prices of all goods and services in the economy.
The fundamental theorem of welfare economics: an efficient allocation of goods
emerges at a competitive equilibrium.
Here: prices -> Smith’s “Invisible Hand” : “ it is not from the benevolence of the
butcher, the brewer, or the baker, that we can expect our dinner, but from their
regard to their own interest”.
Perfect competition: focuses on a single market and relies on the following
assumptions:
- There are “many” small buyers and sellers in the market: None of them
can influence the market price.
- A homogeneous product is traded on the market: There is no product
differentiation.
- No entry barriers: Firms can freely enter and exit the market.
- Perfect information: All buyers and sellers have perfect knowledge of the
prices of all sellers and every firm has access to the same production
technology.
Market long-tun equilibrium: p = AC = MC (Free entry/ profit maximization)
Markets are dynamically efficient in that they establish an efficient blanace
between production and consumption over time.
4 different sources of market failure: market power, information asymmetry,
externalities, transaction costs.
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