Economic Organization and Efficiency Prepared by : Sunil Kumar Tiwari

Economic Organization

Economic Organization deals with material goods and human property and with the labor associated with producing, distributing, and maintaining them.

The Architecture of Organizations.

Organizational architecture has two very different meanings. In one sense it literally refers to the organization in its built environment and in another sense it refers to architecture metaphorically, as a structure which fleshes out the organizations. organizational space: the influence of the spatial environment on humans in and around organizations. organization design: the creation of roles, processes, and formal reporting relationships in an organization.

Boundaries Of An Organization
Organizational boundaries are a central phenomenon, yet despite their significance, research is dominated by transaction cost economics and related exchange-efficiency perspectives
We can develop four boundary conceptions efficiency power competence identity

The Efficiency Principle

An economic theory that states that the maximum social benefit that is received from any type of action is received when the marginal social costs of resource allocation is equal to the benefits from such an allocation of resources. Lays the groundwork on how critical business decisions regarding resource allocation are made.

Concept Of Economic Efficiency

An allocation of resources (quantity) is economically efficient where no reallocation can make one person (human being or business) better off without making another worse off. Economic efficiency distinguished from technical efficiency. An economically efficient allocation is equivalent to maximum (sum of) buyer surplus and seller surplus. Three conditions Same marginal benefit Same marginal cost Marginal benefit = marginal cost Three sufficient conditions for economic efficiency: i. All users achieve same marginal benefit; ii. All suppliers operate at same marginal cost; and iii. Every users marginal benefit = every suppliers marginal cost. When marginal benefit is less than marginal cost, society overall could gain by reducing provision of that item, and vice versa.

The assumptions under which markets are efficient

Perfect competition Complete markets No market failures No externalities No public goods No increasing returns to scale Perfect information about quality about price about the future

Key Problem In Achieving Effectiveness

The information needed to determine the best use of resources and the appropriate adaptations is not freely available to everyone.

Two solutions are possible

The dispersed information is transmitted to a central computer or planner who is expected to solve the resource-allocation problem, or A more decentralized information system must be developed.

Economic Organization Theory Is Transaction

The most fundamental unit of analysis in economic organization theory is the transaction --- the transfer of goods or services from one individual to another. The way a transaction is organized depends on certain of its characteristics. For example, if one kind of transaction occurs frequently in similar ways, people develop routines to manage it effectively. The ultimate participants in transactions are individuals, and their interests and behavior are of fundamental importance for understanding organizations.

Transaction Cost
Transaction costs are the costs of running the economic system: the costs of coordinating and motivating.. Coordination Costs Motivation Costs. informational incompleteness , imperfect commitment.

- Cost of exchanging good in a market - Cost of enforcing property rights

Transaction Costs

Dimensions of Transactions

Specificity of investments required to conduct business;

Frequency of transactions and duration of contracts; Complexity/Uncertainty of transactions; Difficulty in measuring performance in the transaction; The connectedness of transactions.