1.2. Organizations and economic specialization Flashcards
What is an organisation?
system of consciously coordinated activities of two or more people
an abstract social entity
set of elements and factors, personal and material resources
directed towards a set of common goals
product of joint efforts (organisational rent) is distributed among all participants
at any point in time, there’s stability of rules, models, behaviours
Why does economic activity occur primarily within organisations/social entities?
- facilitate achievement of results (more efficient)
- fulfill needs for social relationships (social needs)
4 major types of organisation
- families
- firms
- state/PA
- non-profit
Families
- Fundamental purpose: moral, social
- Primary economic goals: satisfaction of needs of family members
- Core stakeholders: family members
mainly consumption
Firms
- Fundamental purpose: economic
- Primary economic goals: reward core stakeholders
- Core stakeholders:
- shareholders
- employees
- customers
- suppliers
- communities
(depends on the context)
State/PA
- Fundamental purpose: political, social, legal, economic
- Primary economic goals:
- producing and consuming public goods
- rewarding public employees
- Core stakeholders:
- citizens
- public employees
Non profit
- Fundamental purpose: moral, social, cultural
- Primary economic goals: satisfy social/cultural needs of society
- Core stakeholders:
- society
- employees
- donors
Why are there so many different organisations?
economic specialisation
Why do individuals who specialise in small segments of economic activity tend to join together to form organisations?
transaction cost
Why doesn’t all economic activity take place within the framework of one large organisation?
drawbacks of integration
Why are the various organisations outside of the family differentiated in firms, public bodies and non-for profits organisations?
Economic specialisation
when a nation or individual concentrates its productive efforts on producing a limited variety of goods
greater part of the skill, dexterity and judgment -> improvement in productivity
division of labour
Advantages of economic specialisation
- Learning processes -> technical dexterity and efficiency improves
- Use of specialised facilities and equipment
- Reduction in costs of preparing for and transitioning from phase to phase (reduces the risk of error)
- Overcome limitations of individual skills
- Exploit different orientation of people
- Enhance job identification and motivation
Disadvantages of economic specialisation
- Rigidity (non adaptability)
- Demotivation
Transaction costs
costs associated to the mgmt of the transfer of goods or services between two parties
expenses incurred when buying or selling a good or service
What is included in transaction costs?
- Selection costs: find a partner
- Contracting/monitoring costs
- Negotiation costs (delaying a lot of time)
e.g.
- payments that banks and brokers receive for their roles
- real estate, which include the agent’s commission and closing costs, such as title search fees, appraisal fees and government fees
- time and labor associated with transporting goods or commodities across long distances.
Sources of transaction costs
- environment uncertainty
- frequency (of fluctuation)
- opportunistic behaviour (possible takeover/merge)
- specific assets
Drawbacks of grouping activities within one social entity
increase coordination costs
concentration of power
inefficiencies in managing info
Public good
- Non exclusion: cannot prevent individuals from enjoying the good
- Non rivalry/shared onsumprtion: consumption of a good or service by one individual does not reduce the amount available for others to consume
- e.g.
- pure public goods: national defence
- natural monopolies: motorways, ports, railways, electricity, water
Free riding problem
private voluntary provision of a public good
given the non excludability, an individual can abuse it
However, if each individual does the same there will be an underprovision problem: too few contribute and there is not enough public good. THE TRAGEDY OF COMMONS!
State provision becomes necessary
Negative and positive externalities
cost or benefit that is not transmitted through prices and is incurred by a part who was not involved in the transaction causing the cost or benefit ( consequence of an economic activity experienced by unrelated third parties)
e. g.
positive: monuments, tourist attractionsr
negative: pollution
solutions: taxes, regulations or any kind of state intervention
Other reasons why states engage in econ activity?
incomplete markets
information asymmetries (securities, health)
merit goods (vaccination, primary education)
redistribution of wealth
Non profit organisation
not allowed to distribute net earnings but instead use them to helppursue social, cultural, educational or political goals
aim to satisfy demand that state does not meet
e.g. education, health, culture, development, environment, philanthropy, religion
Why non-profits exist?
private producers of public good (market failure)
exploit regulatory advantages granted by states, e.g. tax breaks, preferential tariffs
