BSZ_IM_Ch03_4e - Managerial Economics and Organizational...

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Managerial Economics and Organizational Architecture Instructor’s Manual Part 1: Chapter Overview and Solutions Chapter 3: Page 1 CHAPTER 3 M ARKETS , O RGANIZATIONS , AND THE R OLE OF K NOWLEDGE This chapter answers three primary questions: How do market systems work? What are the relative advantages of market systems compared to central planning in large economies. Why do we observe so much economic activity conducted within firms in market economies? In addition to covering the basic principles of exchange and supply- and-demand analysis, the chapter introduces two concepts that are critical to the subsequent development in the book: specific knowledge and contracting costs . The chapter also makes the important point that individuals have incentives to choose value- maximizing organizational arrangements. An appendix presents the basics of present value analysis and the valuation of common stock. It also discusses the concept of stock market efficiency. This appendix provides useful background material (for example when instructors want to discuss the stock market reactions to events). C HAPTER O UTLINE G OALS OF E CONOMIC S YSTEMS P ROPERTY R IGHTS AND E XCHANGE IN A M ARKET E CONOMY Dimensions of Property Rights Gains from Trade B ASICS OF S UPPLY AND D EMAND The Price Mechanism Linear Supply and Demand Prices as Social Coordinators Measuring the Gains from Trade Government Intervention Externalities and the Coase Theorem M ARKETS VERSUS C ENTRAL P LANNING General versus Specific Knowledge Knowledge Creation Specific Knowledge and the Economic System Incentives in Markets C ONTRACTING C OSTS AND E XISTENCE OF F IRMS Contracting Costs in Markets Contracting Costs within Firms M ANAGERIAL I MPLICATIONS C ASE S TUDY : P ROPERTY R IGHTS S ECURITY IN R USSIAN D EPRIVATIZATION S UMMARY A PPENDIX : S HAREHOLDER V ALUE AND M ARKET E FFICIENCY
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Managerial Economics and Organizational Architecture Instructor’s Manual Part 1: Chapter Overview and Solutions Chapter 3: Page 2 T EACHING THE C HAPTER This chapter presents important background material and should be read by all students. Given our students in organizational economics have previously been exposed to some of the material, we do not spend much time lecturing on the chapter. Rather, we emphasize a few important points that students will need to understand for subsequent parts of the book. We begin by discussing private property rights and how ownership provides powerful incentives. We indicate that private property rights are a key feature of market economies and that employees are typically not owners. Thus, there are potential incentive conflicts within firms (to be discussed in more detail later). Next, we emphasize the importance of specific knowledge in economic decision making and introduce the notion that effective firms link specific knowledge and decision making authority and provide incentives for productive use of this information. This is a key point emphasized throughout the book. Discussed next is the concept of contracting
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This note was uploaded on 04/27/2010 for the course FIN 320f taught by Professor Toprac during the Spring '08 term at University of Texas at Austin.

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BSZ_IM_Ch03_4e - Managerial Economics and Organizational...

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