TOPIC 2, Apuntes de Negocios Internacionales

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Topic 2Topic 2:

Market and OrganizationsMarket and Organizations

Overview

•^

We now move on to ask why the organizationof economic activity matters

-^

Why isn’t everything produced by one firm?

-^

Why isn

’t everything produced by small firms?

•^

Why isn

’t everything produced by small firms?

•^

Why isn’t everything produced by thegovernment?

-^

Before addressing these questions, we willdiscuss basic features of economic activity

Example: I, Pencil (Leonard E. Read)

Specialization

Specialization

•^

Specialization

(sometimes called “division of

labor”) is the employment of a resourcetowards the production of a particular goodor service

-^

In Adam Smith

’s example, specialization

•^

In Adam Smith

’s example, specialization

increases productivity 24,000%

-^

What are the sources of such a remarkableincrease?^ –

Comparative advantage

Fixed production costs

Comparative Advantage

•^

Suppose two resources (A and B) can bedevoted to two alternative types ofproduction (X and Y)

-^

When either resource is devoted to

-^

When either resource is devoted to producing X, there is an opportunity costbecause Y is not produced

-^

Resource A has a

comparative advantage

in the

production of X if this opportunity cost islower than for Resource B

Example: How to Divide Time?

Tires / hr

Shirts / hr

John

5

10

John

5

10

Jane

7

21

Fixed Production Costs

•^

In many types of production process, a fixedcost is required to begin producing

-^

This might include investment in machinery, worker training, or even a psychologicalworker training, or even a psychological “switching cost”

-^

It is more efficient to have each person payjust one such fixed cost rather than haveeveryone pay all of them

Transformation Costs

•^

Transformation costs are the costs of producingoutput that arise from technological necessity

-^

Producing pins requires machines and workers

-^

Purchasing these machines and workers are

-^

Purchasing these machines and workers are transformation costs

-^

Transformation costs per unit of output areaffected by the level of specialization

Unit Transformation Cost

Specialization

Specialization, Exchange, and

Transactions

•^

When we specialize, we by definition have toexchange what we have produced

-^

A

transaction

is the transfer of a good or

service from one person to anotherservice from one person to another

Example

•^

Suppose you want a new bathroom

-^

You have two choices:^ (1) Do it yourself (DIY)(1) Do it yourself (DIY)^ (2) Hire a plumber to do it for you

-^

Specialization advantages from (2)

-^

But what might go wrong?

Problems with Transactions

•^

Transactions don’t always proceed smoothly

-^

Problems can appear on two dimensions^ –

Coordination : the supplier does not provide what^ the consumer wants because of informationthe consumer wants because of information^ limitations or some non-technological trade barrier

Motivation : the supplier does not provide whatthe consumer wants because their preferences arenot aligned and they behave opportunistically

Transaction Costs

•^

Both coordination and motivation problemsneed to be addressed to support exchange

-^

Coordination costs

are the costs related to

matching supply and demandmatching supply and demand

-^

Motivation costs

are the costs related to

ensuring that agents undertake theappropriate actions