1.2. Organizations and economic specialization

Question 1

What is an organisation?

Answer 1

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

Question 2

Why does economic activity occur primarily within organisations/social entities?

Answer 2

1. facilitate achievement of results (more efficient)
2. fulfill needs for social relationships (social needs)

Question 3

4 major types of organisation

Answer 3

• families
• firms
• state/PA
• non-profit

Question 4

Families

Answer 4

1. Fundamental purpose: moral, social
2. Primary economic goals: satisfaction of needs of family members
3. Core stakeholders: family members

mainly consumption

Question 5

Firms

Answer 5

1. Fundamental purpose: economic
2. Primary economic goals: reward core stakeholders
3. Core stakeholders:
   
   • shareholders
   • employees
   • customers
   • suppliers
   • communities

(depends on the context)

Question 6

State/PA

Answer 6

1. Fundamental purpose: political, social, legal, economic
2. Primary economic goals:
   
   • producing and consuming public goods
   • rewarding public employees
3. Core stakeholders:
   
   • citizens
   • public employees

Question 7

Non profit

Answer 7

1. Fundamental purpose: moral, social, cultural
2. Primary economic goals: satisfy social/cultural needs of society
3. Core stakeholders:
   
   • society
   • employees
   • donors

Question 8

Why are there so many different organisations?

Answer 8

economic specialisation

Question 9

Why do individuals who specialise in small segments of economic activity tend to join together to form organisations?

Answer 9

transaction cost

Question 10

Why doesn’t all economic activity take place within the framework of one large organisation?

Answer 10

drawbacks of integration

Question 11

Why are the various organisations outside of the family differentiated in firms, public bodies and non-for profits organisations?

Question 12

Economic specialisation

Answer 12

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

Question 13

Advantages of economic specialisation

Answer 13

• 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

Question 14

Disadvantages of economic specialisation

Answer 14

• Rigidity (non adaptability)
• Demotivation

Question 15

Transaction costs

Answer 15

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

Question 16

What is included in transaction costs?

Answer 16

• 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.

Question 17

Sources of transaction costs

Answer 17

• environment uncertainty
• frequency (of fluctuation)
• opportunistic behaviour (possible takeover/merge)
• specific assets

Question 18

Drawbacks of grouping activities within one social entity

Answer 18

increase coordination costs

concentration of power

inefficiencies in managing info

Question 19

Public good

Answer 19

• 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

Question 20

Free riding problem

Answer 20

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

Question 21

Negative and positive externalities

Answer 21

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

Question 22

Other reasons why states engage in econ activity?

Answer 22

incomplete markets

information asymmetries (securities, health)

merit goods (vaccination, primary education)

redistribution of wealth

Question 23

Non profit organisation

Answer 23

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

Question 24

Why non-profits exist?

Answer 24

private producers of public good (market failure)

exploit regulatory advantages granted by states, e.g. tax breaks, preferential tariffs