The summary contains the weekly topics which are discussed throughout the course, as well as explanations, definitions, visuals and examples from the sessions to understand the concepts. This is the reason for the rather lengthy summary and hence covers every potential question which may be asked i...
● ‘wants’ can be unlimited, resources are always scarce
● To solve this problem: the science of choice (we need to take some things over others/
to sacrifice something - opportunity cost)
● The theory takes into account: individual satisfaction and efficiency
➢ Economic efficiency: efficiency means that resources are allocated optimally
○ Resources are optimally allocated when:
■ They’re directed to their most productive use; or
■ A given amount of production is achieved with a min. of resources
Resources:
= assets or services that meet the needs and wants of individuals
➢ Economic problem: when needs are not met because of the scarcity of resources
there’s a problem allocating scarce resources to the needs of people
○ Economics deals with the (optimal) allocation of scarce sources
➢ Optimal allocation: situation when resources are used efficiently
4 types of resources:
Land (natural resources)
Labour (human resources)
Capital (manmade resources)
Entrepreneurship, information (human resources)
→ money is not a resource
● Human resources are intangible (technological - managerial know-how)
○ Rights (Distribution agreements, financing arrangements, supply contract,
licenses, certifications, franchises)
○ Relationships (customer, trained workforce, distribution relationships)
○ intellectual property (trademarks, training programs, marketing strategies)
○ business knowledge (cost and pricing data)
Specialization leads to better performance and efficiency
● when work is split into specific tasks we may select one that particularly suits our own
capabilities
● specialization relies on the division of Labor (Adam Smith)
● implemented when tasks are divided between team members → development and
improvement
● no time is wasted e.g. on changing or putting different tools aside
● workers can concentrate better because they perform one concrete task and they can
measure their performance to a greater extent
,⇒ more efficiently
Division of labour:
○ increase the productivity → economy of specializations
○ improves productivity, more skilled → save costs leads to the economy of
specialization
○ splitting of tasks into their component parts & having these performed separately
→ it’s a natural phenomenon in human society
○ Specialization: is the cause but also the consequence of division
➢ When specializing: goal is to transact with each other to get our ‘wants’ or ‘needs’ →
we’re not able to produce that much on our own
○ Exchange of goods between to or more parties
○ Transactions give rise to the need for coordination (!)
division of labour → specialization → production
➔ This works to save costs while ensuring maximum production
➔ Carried forward through markets and organizations
division of labour → specialization → coordination
➢ How do we coordinate? Markets and organizations
Markets: an abstract space where parties engage in exchange of goods and services
● The actors meet on the market, and abstract space where parties engaged in exchange
● Parties can exchange goods by barter or by exchange for money
● Competitive feature of the market
○ At least two buyers and one seller; or
○ One buyer and two sellers
Ideal Market: Is where supply and demand meet to ensure maximum efficiency and price is a
sufficient statistic.
Price-mechanism as sufficient statistics
→ the customer does not need to know anything but the price to make the best decisions
economically
● happens very rarely
● therefore people have to come up with the concept of organizations which simplify the
market to participate and transactions in the least complicated way possible
, ● An ideal organization can be characterized as all those forms of coordination of
transactions that do not use price to communicate information between the transaction
parties
● organizations arise as solutions to information problems
Organizations are groups of legal persons with a particular purpose
● Organize these markets
● markets and organizations are two ideal types of cooperation
● markets used surprise system as the coordination device organization uses non price
system authority
● most transactions in the real world I am the form of hybrids
● outside the firm, price movements direct production, which is coordinated through a
series of exchange transactions on the market
● within a firm these market transactions are eliminated and in place of the complicated
market structure with exchange transactions we have an entrepreneur / coordinator who
directs production
● some certain marketing costs are saved
Coase nature of the firm:
● Market is not always efficient
● Various costs involved
● 4 reasons why we need firms
● Costs for using the price system (ideal market=abstract)
● Costs for finding out the relevant information (time-consuming)
● Costs for creating contracts
● Costs of bargaining and decision
● (policing and enforcement costs)
➔ Solution: Organizations (CEO, managers,... → authority carries forward those costs)
➔ Authority within the organizations gather information, bargain contracts and enforce
policies.
➔ Other internal costs however: organizational, infrastructure, contingency plans.
Problems from the Market are solved
➔ Costs are internalized
➔ Information asymmetry is solved
➔ Mitigate unforeseen circumstances
● A firm is essentially a device for creating long term contracts when short term contracts
are too bothersome to make
● Components of the firm:
○ being holistic in nature
, ○ having one mutual objective
○ operating in an environment of perfect information
○ dealing with actors that all want to maximize their profit
● Organizations are an alternative to markets (!) in coordinating transactions
➢ Organizations: the price system as coordination mechanism is replaced by authority
● Some transaction costs that appear in the market are internalized and thus reduced
○ Organizations replace markets to coordinate transactions as they offer a cheaper
alternative to the market organization
○ Besides authority: different theories over firms, why firms arise → key assets
may also decide how transactions may fall into an organizational coordinated
mechanism or a market coordinated mechanism
○ Organizations however produce transaction costs of their own
○ Transactions will shift between markets and organizations depending on the
transaction costs under the two alternatives
● What are organizational transaction costs? E.g. information costs
➢ There are key differences between markets and organizations → both are coordination
mechanisms for transactions
○ The market/organization mix depends on the particular information requirements
of the situation (!)
➢ Environment:
● Provides conditions for the creation of markets and organization
● Shapes organizations and markets by exerting social, economic, political pressures
● Ultime selection mechanisms for determining which organizations and markets survive
➢ Institutions:
○ Institutions are part of the environment
■ Formal and informal rules developed within the society
■ Any structure or mechanisms shaping the behaviour of individuals within
given society
○ Formal institutions and their enforcement expanded due to expansion of markets
■ Personal exchange become impersonal exchange
■ Impersonal exchange offered space to fraud and malevolent behaviour
■ Example: disclosure requirements of public companies
■ Online review rating system: when you read a review you have gained
more information about a product, so you don’t really have to know
anything about the seller
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