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Business Economics I

Markets and Organizations I

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Plan of the Topic

1. Introduction2. What is a Society?3. What is an Organization?4. What is a Market?5. Markets & Organization6. The Social Problem –

Liberalism & Socialism7. Exchange and Property8. The Economic Problem9. Specialization10. Transformation and

Transaction Costs

11. Specialization and Costs12. The Market Solution13. The Role of Prices14. Property Rights15. Pareto-efficiency16. Fairness in Exchange 17. The Political Solution18. A New Balance ?19. The Organizational

Solution20. Externalities21. The Coase Theorem

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Introduction

What is the Economic Problem? What to produce? How to produce? Who to produce for?

What is the Social Problem? How can we combine individual freedom with

social cohesion?

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What is a society I?

A society is a collection of individuals who are in relations with each others. Examples:

Users of internet;The people who live in CataloniaThe people who live in SpainThe bees in a hive

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What is a society II?

As a whole, a society is composed of both individuals and their relationships. In this sense, a society is more than its components

Therefore, if we just gather together a Catalan, a French, and a British, they will not represent a society.

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What is an organization I?

An organization is a society where social relations among individuals are organized by social rules.

Examples: UPF Telefonica The United Nations

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What is an organization II?

Social rules that govern an organization can be explicit (laws, procedures, etc.) and/or implicit (culture, language).

Does the bee hive represent an organization? Do the Internet users represent an organization? Is our class an organization?

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What is a market?

A market is a society where individuals exchange goods and resources at a price.

Examples: The buyers and the sellers of computers Auction site of Yahoo!, eBay Financial markets

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Remarks

Who participates in the exchange? Exchanges can take place among individuals, between individuals

and organizations, among organizations or within an organization.

What is the level of application of the rules? The sales and purchase of computers in Spain is defined by certain

rules as well as the trade of shares on Wall Street is governed by the strict rules of the SEC (Securities and Exchange Commission)

The sales of tobacco is strictly regulated nationally BUT not on the international market

Nowadays, one of the most important issues for the organization of the international markets is the lack of an international political authority

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The Social Problem IHow can we combine individual freedom with social

cohesion?

Liberalism: If individuals are let to be free to exchange, then social cohesion will result naturally. Liberalism focuses on freedom of exchange.

Socialism: Individuals have to be constrained so that social cohesion is preserved. Socialism focuses on rules that govern relationships.

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The Social Problem II Economics has been at the center of the

ideological battle between liberalism and socialism.

In practice, both freedom and rules exist in society.

Do we accept to talk about both or do we reduce the understanding of society to one aspect or the other?

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The Social Problem III

Economics has been criticized for reducing the social problem to the one of freedom of exchange. Today, a main issue is the organization of international markets in the absence of international political authority.

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Liberalism I Many authors in Economics have tried to

show that exchanges determine social cohesion, for the good or for the bad.

For instance, Adam Smith has argued that the free exchange of goods and resources leads to an efficient social allocation of resources by itself.

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Liberalism II

Later, Ronald Coase has argued that such an efficiency does not depend on the initial allocation of property rights provided these rights can also be exchanged at low cost.

The argument is that freedom by itself leads to social cohesion and social development.

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Socialism I Karl Marx has argued that freedom of exchange

can be a means to ensure social domination of one class of individuals (those who can acquire property rights, i.e. the capitalists) over other classes (the individuals who must sell their property rights).

Ultimately, alienation of rights was told to lead to the collapse of a system based on the free exchange of private property rights. Marx proposed that the allocation of resources must be dictated by the society as a whole. The property of rights to produce should be collective.

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Socialism II

The end of XX century has seen the collapse of the “communist system” as understood as the collective property of production means. But the beginning of the XXI century also shows signs that a system solely based on free exchange is fragile and may collapse.

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The Economic Problem I Economics has been primarily concerned by the question of

exchange of goods and resources among individuals.

Two forms of exchange are distinguished: initiated by the individual or controlled by the society.

But exchange presupposes the notion of property. Therefore, we must consider simultaneously the notions of exchange and of property.

Two forms of property are distinguished: individual or collective.

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The Economic Problem II

What to produce? Allocation of resources

How to produce? Efficiency in the use of resources

Who to produce for? Distribution

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Specialization

Specialization: a resource is specialized when it is usually more suitable for a specific product/service and offers comparative advantage in its production/provision

Example: Primary school teacher and University professor Upa Dance and Celine Dion Axe and machine gun

When a resource gets more specialized, the total cost of production varies due to the increase of the transaction costs and the decrease of the transformation costs.

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Transformation and Transaction Costs I

The cost of producing a product or a service consists of the sum of the transformation costs and the transaction costs

costsn Transactio

coststion Transforma Costs Total

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Transformation and Transaction Costs II

Transaction Costs – All the costs incurred directly or indirectly by the by the need to coordinate the specialized resources and to motivate their owners

costsotivation M

costson Coordinati Costsn Transactio

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Transformation and Transaction Costs III

Coordination costs: the costs caused by the need to coordinate the supply and the demand

The participants in the exchange need to know the answers of 3 questions about the resources that are offered and demanded: When Where, and in What quantities

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Transformation and Transaction Costs IV

Examples: Advertisements Announcements in the newspapers Internet (eBay) Miguel and Maria

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Transformation and Transaction Costs V

Motivation costs: all the costs that are incurred in order to align the interests of the participants in the exchange

Examples: Supervision and Monitoring Audited financial statements Ticket controllers in the public transport

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Transformation and Transaction Costs VI

Why do motivation costs exist? Most exchanges are complex and represent

promises linked to certain circumstances that are more or less expected beforehand

Example: Maria has to develop a webpage by the 1st of

March, which presupposes that she will be healthy and capable to work, the computer will be functioning correctly, there will electricity, etc.

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Transformation and Transaction Costs VII

Promises, however can be broken Example:

Maria does not finish the webpage on time because of

a) being sick or b) preferring to go to many UPF parties

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Transformation and Transaction Costs VIII

Opportunism: behaviour that harms the other party and is undertaken in order to serve the interest of the party that breaks the promise.

Example: Maria and Miguel have to finish a webpage by

today and have already been paid. They, however, don’t finish it on time because they work on another project for which they get more money.