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EC1202
Why do firms exist?
| Term | Definition |
|---|---|
| Firm | Organisation that buy or hire factors of production to produce goods and services which can be sold for profit |
| Why do firms exist? | Offers a range of additional advantages as organisers of production; which consumers would not otherwise benefit |
| Why can't we offer a sperate contract for each function of a firm? | High Transaction Cost |
| High Transaction Cost | Multilateral contract or complex set of contracts would be costly to negotiate |
| How can costs be reduced? | Bilateral Contracts |
| Transaction Cost Theory | The goal of an organisation is to minimise the costs of exchanging resources in the environment and the costs of managing exchanges inside the organisation |
| Samples of Transaction costs | Search and information Bargaining and decision Policing and enforcement |
| How can a firm expand? | If the firm's activities can be performed cheaper within the firm than outsourcing the activities to external providers in the market |
| When can a firm emerge? | If an economising organisation can reduce its production + transaction costs less than market prices |
| When does a firm's expansion have to stop? | When intra-org TC is larger than market prices |
| Innovation | The process and outcome of creating something new |
| Schumpeterian Trilogy | Invention. Innovation, Diffusion |
| Invention | Creation of an idea to do or make something |
| Innovation | New Product/Process commercially valuable |
| Diffusion | The spread of a new innovation throughout society or at least throughout the relevant part of society |
| Product Innovation | New Product or Service |
| Process Innovation | Existing product or service for a new market: New method of production New source of supply New Organsization of production |
| Goals other than profit max. | Transaction Cost Approach Growth Maximisation Utility Maximisation Behavioural theories of the firm |
| What does Profit Max. Models depend on? | Market Structure |
| What is Market Structure? | The number of competitors in the market, the freedom with which competitors can enter a market and whether the different firms in the market sell unique products |
| Common market structures include | 1. Perfect Competition 2. Monopolies 3. Monopolistic Competition 4. Oligopolies |
| Monopoly | Firms exists under perfect competition |
| Oligopoly | When a small number of firms operate within a market |
| Managerial Approaches | Baumol's Model: Sales Maximisation Marris's Theory: Growth Maximisation Williamson's Model: Mangerial Utility Function |
| Baumol's Theory | Firms focus on maximising sales for revenue maximisation |
| Williamson's Model | Mangers apply their discretionary power to maximise their own utility function |
| Marris's Theory | Strategy of maximising growth of firm |
| Two types of constraints with Marris's Theory | Managerial Constraint on growth Financial Constraint on growth |
| Why do managerial constraints arise? | Limit to manages ability to manage and achieve optimum efficiency |
| Why do financial constraints arise? | Conflict between managers' ability function and owner's utility function |
| How do firm's sub-optimal behaviour arise? | From uncertainty and conflicting goals of various groups within the firm |
Created by:
peadarbailey1206