Summary
Summary foundations of international strategy
- Course
- Institution
- Book
summary of the book economic approaches to organization
[Show more]
Connected book
Book Title:
Author(s):
- Edition:
- ISBN:
- Edition:
More summaries for
-
Complete Summary Business for Lawyers - Notes on all Chapters/Readings + Lectures + Tutorials
-
Summary lectures/chapters Foundations of international strategy
-
Summary + lecture notes Introduction to Economics and Business
Seller
Follow
pratibhakalikadien
Reviews received
Content preview
Chapter 1. Markets and organizationsFramework:
Environment and
institutions
Division of labour
Specialization
Coordination
Organizatio
Market Information
n
1.1 The economic problem
● Economic problem: what is the optimal allocation of scarce resources over the
alternative uses that can be made of them → resources are used with
efficiency
● Economic approaches to organizations are used when the problem has an economic
aspect: whenever part of the problem deals with (optimal) allocation of scarce resources
● The economic contribution to our understanding of an organizational problem, increases
when the economic problem forms a greater part of the organizational problem we are
trying to understand
1.2 The division of labour
● Division of labour: Splitting of composite tasks into their component parts and having
these performed separately to make more in the same or even less time
● Progressive division of labour → productivity increases → increasing ‘wealth of
nations’
1.3 Specialization
● Specialized production: More efficient as there is more production with less goods / time
○ All attention goes to 1 specific tasks, and you can gain more experience
● Cost of specialization: choices have to be made, you can’t specialize in 2 things
○ Costs: restricted choices, gains: higher levels of performance can be reached
,1.4 Coordination
● For specialization, exchange has to take place (goods / money / information)
● Goods involving exchange have to be scarce
● Whenever exchange takes place, we speak of a transaction
● How is the coordination achieved within an economic system? Or; how do parties willing
to exchange in a transaction find each other? (1.5)
1.5 Markets and organizations
● The price system is the coordinating device that takes care of allocation
○ The price is a sufficient statistic: the price contains all the information you need to
base your transaction on; you don’t need to know anything else (no personal contact)
● Market mechanism → equilibrium: an optimal allocation of a good has been
achieved
● There is a cost associated with using the price system:
○ A cost (time) involved finding out the relevant prices
○ A contract is usually drawn to provide the basis for a market transaction
○ There may be conditions under which it is hardly possible (/extremely costly) to reach
a contractual agreement that may serve as a basis for market exchange
● In those cases, organization may provide an alternative: The price system is replaced by
authority: choices are made based on the cheapest transaction costs.
○ Organizations: firms, governments, trade unions, church, etc.
● 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
1.6 Information
● Information is crucial in the framework
● There are many situations in which the price cannot absorb all the information necessary
to enable the execution of transactions.
○ The price has to be supplemented / the price mechanism is fully incapable
○ Organizations arise as solutions to information problems:
Market ↔️ organization is based on the particular information requirements of the situation.
1.7 The environment and institutions
● The environment: The context in which the trade-offs market ↔️ organizational
coordination are made (in nature, social, political, cultural, institutional dimensions)
, ● Evolutionary approaches to organizations are pressured/selected by their environment
(abortion)
● Organizations and markets do not operate in a vacuum, but live in an environment that:
○ Provides the conditions for particular organizations to be created
○ Shapes all organizations by exerting economic, social, political, other pressures
○ Is also the ultimate selection mechanism for determining which organizations can
survive and be successful (while other organizations are ‘selected out’ and perish)
● Governments have a fundamental influence on which markets are allowed to exist and
how they function (in centrally planned economies and in market economies)
● Institutions: the rules of the game in a society; the humanly devised constraints that
shape human interaction
○ Formal: written laws, constitutions, regulations and the like
○ Informal: Norms of behaviour, conventions, internally imposed rules of conduct
● The government is a particularly important actor in the environment of markets and
organizations (E.G. governments stepped in and compensated for such ‘market failures’)
1.8 Historical perspective
2 reasons why it took so long to raise the question: Why do we observe so many organizations
if markets are so efficient ( Coase, 1937)
● Until recently, most (but not all) economists focused their attention on how the markets
achieves coordination between organizations (and individuals)
○ First the theory of markets itself was elaborately investigated
○ New theoretical approaches: ec. Transactions → executed within
organizations
● Most (but not all) organization theorists studied coordination within organizations
○ First attempts to formulate ‘one best way to organize’ → dependent on
situation
● Now: family of economic approaches to organizations:
○ Economic theories of organization
Chapter 2. Markets; SET
2.1 Introduction
● Standard microeconomic theory (SET) explains the functioning of markets which
○ Have demand +supply & matches them at a certain price (price → market interaction)
● SET: Market is the ideal mechanism for economic exchange (= perfect competition model)
, 2.2 Market interaction: analysis of demand and supply
● Law of demand (Price ↑ = demand ↓) vs law of supply (Price ↑ = supply ↑)
● Market equilibrium: intersection of the supply curve and the demand curve
2.3 Decision-making by consumers
● Transitive: Preference ranking of certain goods
● Transitive → indifference curves: preferences of a
set further from the origin
● Utility: The satisfaction consumers derive from
having goods
○ Consumers gets the same level of utility
from 2 points on the indifference curve
● Budget line: the quantity of 2 goods someone can
buy with their budget
● SET assumes: Measuring utility is not possible (only
ranking) + goal = maximizing level of utility (intersection
budget line + indifference curve)
2.4 Decision-making by producers
● 2 main questions in SET: How does a producer decide how much she is going to
produce // how they will produce the quantity → answering needs description of
a firm
● A firm: an entity that maximizes profit
○ depends on quantity produced (Q), amount of capital (K), amount of labor (L)
○ Direct relationship between these: Production function: Q=Q (K , L)
● SET assumes in a competitive market Q,K,L are easily calculated to give max profit
2.5 Market coordination
● Producer maximizes profit → supply curve, consumer maximizes utility →
demand curve
● Changes of demand/supply = shifts of demands/supply curve
2.6 The paradox of profits
● A firm can’t make profit in the long run (profit in excess of normal profit)
○ Low profit: free exit
○ Excessive profit → entry → supply ↑ → price ↓ → profit would vanish
● Management within firms wit SET:
○ Firms cannot change (are either adapted to environment / disappear)
○ No room for differentiation = isomorphism (same products, costs, structure)
○ No room for competitive advantage
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller pratibhakalikadien. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $3.18. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
48041 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 15 years now