Asymmetric Information and Market for Lemons
Discuss about the Economic Theory Of the Managerial Firms.
Economic problem arises when there are insufficient resources to satisfy unlimited human needs and wants. It assumes that human needs are unlimited and resources to satisfy those wants are limited. Market for lemons refers to the problem that arises due to asymmetric information between buyer and seller of product about its value (McCann, 2016). Quality, uncertainty and market mechanism are the factors which determine value and asymmetry leave only lemons behind. Hayek theory says knowledge is unevenly dispersed among individuals and people with local knowledge can take best decisions rather than central authority. Search theory refers to individual strategy of choosing from the variety of options available of similar quality under the assumption that delaying is costly. According to Hayek-Misses demand and supply are taken into consideration to achieve equilibrium and in Langer-Lerner means of production and trial and error approach are taken into consideration to determine output and economic equilibrium.
Market is a medium that allows buyers and sellers of goods and services to interact and make exchange of goods and services. General equilibrium theory fails due to unrealistic assumption of perfect competition; all consumers have same aims, taste and preferences and their economic decisions are in harmony with each other; all consumers consume same product without any time lag (Chand, 2018). Problems associated with standard price theory is it provides theoretical analysis of individual parts of economy which is difficult to study as it changed frequently; based on data which is not reliable; efficient use of scarce resources. Role of entrepreneur is to take risk of developing new goods and services and bringing these products into the market for financial gains. Short selling refers to sale of securities not owned by the seller on the belief that price will fall and brought back will make profit. Insider dealing is an illegal practice of trading on stock exchange for your benefit through access to confidential information (Starr, 2011).
According to classical economics cost is determined by the sum of cost of resources that are required to make a product. It includes cost of capital, land, labor and taxation. According to neo classical approach cost is determined as a total of cost of resources that are required to make a product along with profit margin and opportunity cost that is sacrificed in producing that product (Anushree., 2018).Cost is subjective in any theory of choice where the cost of producing one good is the amount of goods that have been produced instead. It is a predictive theory of economic behavior where choice is involved and cost become subjective. Private cost refers to internal cost of producing goods such as inputs, labor, rent and depreciation and public cost includes internal cost as well as external cost such as cost of environmental damage.
Market Equilibrium and Theories of Choice
Structure, conduct and performance is a framework to establish relation between market structure, market conduct and market performance. In structure variables are stable and effect behavior of buyers and sellers; in conduct behavior of buyers among themselves and against each other are studied; in performance the result of firm is compared with industry. Market concentration measures the extent to which sales of the market are influenced by one or two firms (Eduquas., 2016). Market concentration can be measured on the basis of level of competition and whether the firm is price taker or price maker. Price discrimination refers to the strategy of charging different prices from different customers for the same product. The seller charges the maximum amount which the buyer is willing to pay. Empirical test of market power and profitability helps to know the power gained and profits occurred over a period of time on the basis of experience or direct data.
Externality is a positive or negative consequence of an industrial or commercial activity which is experienced by unrelated third parties. It’s an activity which affects third parties without being reflected in prices.Policy relevant to externality means cost and benefits will effect parties who choose to incur them. It will not affect parties who are external to it and are not involved in cost and benefits (Caplan, 2017). Coase theorem is a legal and economic theory that assumes that market is highly competitive and there is no transaction cost. An efficient set of input and output is selected from optimal production distribution regardless of how property rights are divided. In relation to property rights coase thermo states that if property rights are clearly defined and there is no transaction cost then people can be held responsible for negative externalities they impose on others.
Managerial theory of firm explains behavior of managers and effect of his conduct on the company and economy as a whole. The managers want to maximize rate of growth of firm which has connections with both sales and profits of firm. According to coasiantheory of firm transaction cost is the cost of providing for goods and services from the market rather than from within the firm itself. Institution and transaction cost is the expense incurred in buying and selling of goods and service (Allen & Doherty, 2013). It also includes dealer commission which is the difference between price charged by dealer and paid by buyer (Annoynomous., 2017). Vertical integration is a strategy in which a company expands its business operations into different steps on same production path. Williamson transaction cost analysis covers cost such as communication charges, legal fees, information cost for searching information about price, quality and durability along with transportation cost (Lambertini, 2017).
Market Concentration and Price Discrimination
Innovation means new idea,method or product that creates value which is paid by the customer. Innovation as market failure means that product or idea is not able to gain acceptance by the customer and has failed to flourish (NA., 2016). Research and development is undertaken to innovate, introduce and improve products and services. Innovation system refers to the flow of technology and information among people, enterprise and institutions. In this system an idea is converted into a product, process and service through a medium. Innovation as an entrepreneurial theory means innovative ideas so as to increase profits and growth of firm. Nowadays there is an increase in popularity concept of inside the black box. It is used in evaluation of performance of product, process, service or innovative idea. It is used to analyses whether it is profitable or not or an idea should be converted into product or not.
Public interest theory states government regulation is required for the interest of public whenever there is market failure due to lack of competition, barriers to entry, information asymmetry and public goods product (Domas, 2003). This theory is based on the assumption that economic markets are subject to market imperfection or transaction failures. Private interest theory is based on the assumption that individuals workfor their own self-interest and they will form groups for their economic interest. They are motivated by the concept of fame, power, wealth and self-interest. In this theory public interest is not considered rather personal interest is taken into consideration. Institutional possibility frontier is a tradeoff between disorder and dictatorship. This theory implies that social institutions are situated between two extremes of dictatorship and disorder each has its own continuum of social losses. It signifies that tradeoff between dictatorship and disorder is more severe and causes huge losses at both ends.
Bit coin is a crypto currency and a new type of worldwide payment method. It is the first decentralized digital currency which works without a central bank or single administrator. In it transactions take place between users directly. Crypto currency is not money rather they are unique financial instrument which is used in exchange of goods and services with no intermediaries in between. Ledgers play as important role in shaping economic institutions as it is these leaders which keeps the record of every transaction and parties involved separately. Block chain is a growing list of records called blocks which are linked and secured using cryptography. It can support and compete with firms, markets and government as it maintains record so it supports by providing information what and when required and it helps to compete by comparing information of different firms, markets and government about the same concept.
Bureaucracy is a system of government in which most of the important decisions are taken by the state officials rather than the elected representatives. It is managed by department staff which is non-elected officials. All important decisions are taken by staff by following the rules and regulations carefully. Democracy is a system of government in which citizen exercise power directly or chooses a representative from among themselves to form a governing body. It is also known as rule of the majority in which all citizens take part to form government in the form of elections. It is a government for the people, by the people and to the people. Voting is a process in which people express their decisions in favor or not in favor regarding a particular topic or activity or government with the help of votes. It is an expression of opinion followed by debates and disscussions.
Allen, B. & Doherty, N., 2013. Managerial Economics: Theory, Applications, and Cases. London: Springer Publications.
Annoynomous., 2017. economist.com. [Online] Available at: https://www.economist.com/economics-brief/2017/07/27/coases-theory-of-the-firm [Accessed 24 May 2018].
Anushree., 2018. economicsdiscussion.net. [Online] Available at: https://www.economicsdiscussion.net/inflation/price-level/classical-theory-of-price-level-macroeconomics/26653 [Accessed 24 May 2018].
Caplan, B., 2017. econlib.org. [Online] Available at: https://www.econlib.org/library/Enc/Externalities.html [Accessed 24 May 2018].
Chand, S., 2018. Yourarticlelibrary. [Online] Available at: https://www.yourarticlelibrary.com/economics/general-equilibrium-in-economics-meaning-assumptions-working-and-limitations/28937 [Accessed 24 May 2018].
Domas, M., 2003. The Public Interest Theory of Regulation: Non-Existence or Misinterpretation? European Journal of Law and Economics, 15(2), pp.165-94.
Eduquas., 2016. tutor2u.net. [Online] Available at: https://www.tutor2u.net/economics/reference/market-concentration [Accessed 24 May 2018].
Lambertini, L., 2017. An Economic Theory of Managerial Firms: Strategic Delegation. London: Springer Publications.
McCann, P., 2016. The UK Regional–National Economic Problem: Geography, globalisation. New York: Springer Publications.
NA., 2016. The Economic Theory of ‘Managerial’ Capitalism – Page 50. London: Springer Publications.
Starr, R., 2011. General Equilibrium Theory: An Introduction. London: Wiley Publications.
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