Business for lawyer’s readings
Ch. 1 Markets and organizatons
The economic problem
Economic problem = how to make best use of the available resources due to scarcity.
What is the optmal allocaton of the scarce resources over the alternatve uses that can be
made of them?
Efficiency = resources that are optmally allocated
Economic aspect = part which deals with the (optmall allocaton of scarce resources.
An economic problem can form a larger part of the organizatonal problem within the world.
Solving an economic problem helps to understand the organizatonal problem.
The division of labour
Division of labour refers to the splitng of composite tasks into their component parts and
having these performed separately.
A lot of companies have diferent departments and organizaton in order to act out 1 larger
task. Organizaton charts are used to guide us through the organizatonal territory.
The division of labour leads to an increase of productvity.
Specializaton
Specialized producton is more efficient than unspecialized producton. Because, the same
amount of output can be produced with less labour efort. A greater amount of output can thus
be achieved with the same level of labour input.
Splitng tasks gives the opportunity to select a task which partcularly suits our own needs and
capabilites. Specialize improve performing of that task.
Disadvantage of specializatonn restrictng choice. The limits of specializaton are reached when
the satsfacton gained from higher performance is outweighed by the dissatsfacton from too
narrow an area of applicaton of onees skills.
Individual limits are one boundary to increasing specializaton. The other boundaries
organizatonaln high organizatonal specializaton may lead to insufficient collaboraton in
addressing new challengesn Silo efect: in short term, efficiency improved and proft rocketed,
however over tme reforms began to backfre. Internal competton killed collaboraton and
innovaton slowed.
Coordinaton
Exchange = goods and services are exchanged whenever the right to use them is transferred.
Exchange takes place through markets.
Exchange of goods is benefcial to both partes of the exchange.
,Goods are only goods when scarce resources are involved.
Exchange Transacton.
In order to achieve a transacton, partes need to fnd each other? In other wordsn How is the
coordinaton achieved within an economic system?
Specializaton needs to a need for coordinaton.
Markets and organizatons
The price system is the coordinatng device that takes care of allocaton.
The price system is a sufficient statstc.
Sufficient statstc = contains all the informaton you need to base your transacton on.
Optmal allocaton of the marketn equuilibrium between supply and demand.
Optmal allocaton is the middle fgure. This optmal allocaton obtains without any personal
contact being made between the transactng partes.
Markets with optmal allocaton are ofen markets with raw materials = ideal market.
Why is an organizaton necessary when co-ordinaton is done by the price system?
Coasen
There is a cost associated with using the price systemn
Cost is involved in fnding out relevant prices (tmel
Contract is drawn to provide the basis for a market transacton (specify conditonsl
It may be hard to reach a contractual agreement
Son organizaton may provide an alternatve. Markets and organizatons are alternatves for the
executon of transactons. Authority is the new coordinatng mechanism.
Because transactons will only be executed at the lowest costs transactons will shif
between markets and organizaton as a functon of the transacton costs under these two
alternatves.
,Markets and organizatons are thus 2 ideal types of coordinaton for the exchange of
transactons.
Ideal market = prices act as sufficient statstcs for individual decision making
Ideal organizatons = forms of coordinaton not using the prices to communicate informaton.
Organizatons instead of markets:
Price system is supplemented with authority
Some transacton costs disappear because they are internalized
However, organizatons produce transacton costs of their own
Informaton
The type of coordinaton mechanism depends on the informaton requuirements that are
inherent in a partcular situaton.
Informaton is the crucial concept in our frameworkn explaining how coordinaton will take
place.
Organizatons arise as solutons to informaton problemsn more suited to deal with certain
informaton problems than markets.
In a market, informaton asymmetries exist, the price is sufficient. However, in an organizaton
there is internal authority, which solves the problem of informaton asymmetries.
The environment and insttutons
Environment = the context in which the trade-ofs between market and organizatonal
coordinaton are made. The environment also includes social, politcal, cultural or insttutonal
factors.
Environmental pressures have shaped organizatons with respect to their labour practces,
waste management or internatonalizaton.
Organizatons do not exist in in a vacuum, but live in an environment thatn
Provides the conditons for partcular organizatons to be created
Shapes all organizatons by exertng economic, social, politcal and other pressures
Is also the ultmate selecton mechanism for determining which organizatons can
survive and be successful?
Not only organizatons, but also markets are shaped and selected by environments. The
government has a huge infuence on which markets can exist and how they functon.
The functoning of markets is also afected by other actors in the environment (trade unions,
pressure groups, eco-behaviourl. New markets can come into being as a result of
environmental developments, such as advancing technology. Old markets can shrink or
disappear for the same reasons. Son markets do not functon in vacuum either.
Markets operate in an environment thatn
Provides the conditons for partcular markets to be created
Shapes all markets by exertng economic, social, politcal and other pressures
, Is also the ultmate selecton mechanism for determining which markets can survive and
be successful?
Insttutons = the rules of the game in a society, or more formally, the humanly devised
constraints that shape human interacton.
Formal rules = writen laws, consttutons, regulatons etc.
Informal rules = norms and behaviour, conventons and internally imposed rules of conduct
(company culturel.
Formal and informal enforcement of rules (legal courts, peer pressure, social sanctonsl. In most
countries, the role of formal rules and enforcement has increased over tme.
Importance of insttutonsn legal and regulatory frameworks to ensure that contracts are
enforced, orderly way of solving disputes, ensurement, banks etc. Helps ensure securites
markets operate in a fair manner.
The government is a partcularly important actor in the environment of markets and
organizatons to survive. Government has stepped in and compensated for mmarket failurese,
providing a safety net for the poor. Also, governments provide educaton to all and furnished
much of the insttutonal infrastructure, such as the legal system, which is requuired for markets
to work efectvely. Next to governments, many other factors play a role in shaping economic
actvites in markets and frmsn trade unions, consumer groups, NGOs, traditon, norms, specifc
codes of conduct.
All such actors and factors consttute the specifc environmental context and insttutonal
framework in which the economic actvity is carried out in organizatons and markets.
Environmental and insttutonal factors codetermine which markets and organizatons are
allowed to exist and also exert pressure on how they functon. Those factors evolve over tme
as governments change, laws are amended, social norms develop, and new issues and
challenges have to be addressed by societes.
