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MANAGERIAL ECONOMICS

Introduction: This assignment’s objective is to argue and apply the concepts firm v market, TCE, make or buy dilemma, vertical boundaries of the firm and vertical chain. Definitions: TCE: An understanding of transaction cost economy is the central to study organizations. TCE is more interdisciplinary, insistently emphasizes refutable implications, invites empirical testing, and is more concerned with public policy effects. Although still undergoing development in fully formal modeling respects, the combination of semi-formal models (Riordan and Williamson, 1985), diagrams (such as the simple contractual schema), and a widely shared verbal understanding of the logic of discriminating alignment have supported TCE applications described elsewhere (Williamson, 1990). Indeed, the move from words to diagrams to mathematical models is what the natural progression contemplates. The focus is on the evolution of the firm. The materials begin by introducing transactions cost economics (TCE), which argues that firms are important when contracts are incomplete, and firms make large specific investments. Firms are complex, a ‘nexus of contracts’ where Management takes the view that vertical integration is useful for assuring input supply in an uncertain world. However coordination can be a problem in vertical chains yet management. Need to obtain economies of scale and size in production in order to be profitable. A critical task for management is to define the boundaries of the firm by determining what to make and what to buy. Sources of transaction cost economy Collecting information on prices, Negotiating contracts, Researching potential suppliers, Monitoring supplier’s output, legal costs on breach of contracts Opportunity and trust (Williamson)

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Eng. Mohamed Yassein

Make or Buy Dilemma: A fundamental questions which activities in the vertical chain a firm should perform itself and which it should leave to independent firms in the...