Basic Concepts in Economics of Firms
Basic Concepts
The economics of business enterprise, an introduction to economic organisation and the theory of the firm Martin Ricketts (chp. 1-5) …and more…
Aida Isabel Tavares Economia da Empresa 1
Quick review about the basics of theory of the firm
Firms under the neoclassic view are treated as a production black-box: input → firm → output Fundamental issues about firms: Why do firms exist? How different are firms versus markets? What determines firm’s scope or boundaries? M&As; Spin-offs; Alliances What determines firm’s organizational forms? Corporations, partnership, proprietary Chain stores, franchises, alliances MNEs: Subsidiaries vs. joint-ventures; horizontal vs. vertical FDIs; why R&D is mostly done at headquarters
Aida Isabel Tavares Economia da Empresa
2
Short review of the theoretical progress
¤ Ronald Coase (1937), The Nature of the Firm ¤Principal-agent theory (Alchian and Demsetz; Holmstrom) ¤ Transaction cost economics (Oliver Williamson) ¤ Property rights theory (Oliver Hart and Grossman) Incomplete contracts
Aida Isabel Tavares Economia da Empresa
3
Summary I) II) III) IV) V) VI) Gains from trade Transaction costs The entrepreneur Property rights Principal and agent Vertical integration
Aida Isabel Tavares Economia da Empresa
4
I) GAINS FROM TRADE firm – legal concept ∫ economic concept neoclassic definition – microeconomic unit: inputs ö outputs nature of the firm – process of production that involves coordination (individuals and activities) without explicit bilateral contracts that bind individuals together scarcity – the best use of resources involve agreements between individuals - how do this agreements are formulated information – is not perfect nor complete nor observable nor verifiable coordination mechanisms – specialization and bargaining; price system
Aida Isabel Tavares Economia da Empresa
5
Firms – in a world of costly knowledge and relationships – firms are a mechanism for
The economics of business enterprise, an introduction to economic organisation and the theory of the firm Martin Ricketts (chp. 1-5) …and more…
Aida Isabel Tavares Economia da Empresa 1
Quick review about the basics of theory of the firm
Firms under the neoclassic view are treated as a production black-box: input → firm → output Fundamental issues about firms: Why do firms exist? How different are firms versus markets? What determines firm’s scope or boundaries? M&As; Spin-offs; Alliances What determines firm’s organizational forms? Corporations, partnership, proprietary Chain stores, franchises, alliances MNEs: Subsidiaries vs. joint-ventures; horizontal vs. vertical FDIs; why R&D is mostly done at headquarters
Aida Isabel Tavares Economia da Empresa
2
Short review of the theoretical progress
¤ Ronald Coase (1937), The Nature of the Firm ¤Principal-agent theory (Alchian and Demsetz; Holmstrom) ¤ Transaction cost economics (Oliver Williamson) ¤ Property rights theory (Oliver Hart and Grossman) Incomplete contracts
Aida Isabel Tavares Economia da Empresa
3
Summary I) II) III) IV) V) VI) Gains from trade Transaction costs The entrepreneur Property rights Principal and agent Vertical integration
Aida Isabel Tavares Economia da Empresa
4
I) GAINS FROM TRADE firm – legal concept ∫ economic concept neoclassic definition – microeconomic unit: inputs ö outputs nature of the firm – process of production that involves coordination (individuals and activities) without explicit bilateral contracts that bind individuals together scarcity – the best use of resources involve agreements between individuals - how do this agreements are formulated information – is not perfect nor complete nor observable nor verifiable coordination mechanisms – specialization and bargaining; price system
Aida Isabel Tavares Economia da Empresa
5
Firms – in a world of costly knowledge and relationships – firms are a mechanism for