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Douma and Schreuder, Economic Approaches to Organisations PowerPoints on the Web, 5th
edition, © Pearson Education Limited 2013
Slide 1.1
Part 1
Foundations
Chapter 1
Markets and organizations

Slide 1.2
LEARNING OUTCOMES:
At the end of this lesson, you will be able to:
Demonstrate an understanding of the basic conceptual framework in
explaining the fundamental economic approach to organizations.
Illustrate and describe the conceptual framework.
Elaborate using real life example how division of labor leads to
specialization.
Describe the need of coordination.
Explain the two types of coordination of exchange transactions:
market and organizations.
Relate the environmental context and an institutional framework in
markets and organizations.

Slide 1.3
1. Understanding the
economic problem

Slide 1.4
The economic problem
A situation where needs would not be met as a result of scarcity of
resources – resources refers to all factors that may contribute towards
the satisfaction of human needs.
The problem of how to make the best use of the available resources.
Resources that are optimally allocated are said to be used with
efficiency.
Economic approaches to organization are based on two perspectives
below:
1.Economic approaches to organizations focus specifically on the
economic problem of optimal allocation of scarce resources.
2.The economic contribution to our understanding of an organizational
problem increases when the economic problem forms a greater part of
the organizational problem that we are trying to understand.

Slide 1.5
2. Focus on the basic
conceptual framework
https://www.youtube.com/watch?v=8ruiUOQERnw
Watch the video. Take note of what inspired you
most.

Slide 1.6
Figure 1.1 The basic concepts

Slide 1.7
The pin factory:
Tremendous increase in productivity of the work of pin-makers could be
achieved by splitting this work up into distinct tasks and having each
worker perform one specific task rather than making entire pins.
1.Division of labor:
It refers to the splitting of composite tasks into their component parts and
having these performed separately.
Division of labor led to productivity increases that constituted the main
source of the increasing ‘wealth of nations’.
Why would an increasing division of labor lead to productivity increases
and thus to a growth in the ‘wealth of nations’?

Slide 1.8
Figure 1.2 Division of labour leads to specialization

Slide 1.9
2. Specialization:
According to Smith:
This great increase in the quantity of work, which, in consequence of
the division of labor, the same number of people are capable of
performing, is owing to three different circumstances;
i.First, to increase of dexterity in every particular workman;
ii.Secondly, to the saving of the time which is commonly lost in passing
from one species of work to another;
iii.Lastly, to the invention of a great number of machines which facilitate
and abridge labour and enable one man to do the work of many.

Slide 1.10
Figure 1.3 Specialization entails coordination

Slide 1.11
3. Coordination:
Division of labor and specialization are pervasive phenomena in
society. As a result, hardly any people are economically self-reliant, in
the sense that they produce all the goods and services they wish to
consume. In order to obtain those goods and services, they have to
acquire them from other specialized people.
In economic terminology we say that exchange has to take place.
Goods and services are exchanged whenever the right to use them is
transferred.
Exchange of goods is usually beneficial to both parties to the
exchange. Whenever exchange takes place, we speak of an
economic transaction.
Owing to the division of labor and to specialization, innumerable
transactions have to occur in society. A vast network of exchange is
necessary to allocate goods and services. How is the coordination
achieved within an economic system?

Slide 1.12
Figure 1.4 There are two types of ideal coordination: market and organization

Slide 1.13
4. Markets and organizations
Specialization leads to a need for coordination. Essentially, we shall
submit, there are two types of coordination. Transactions may take
place either across markets or within organizations.
Ideal market is characterized by the fact that prices act as sufficient
statistics for individual decision making.
Ideal organizations can be characterized as all those forms of
coordination of transactions that do not use prices to communicate
information between transacting parties.
Read ‘Why do firms exist?’ The Economist, 16 December 2010 at
http://www.economist.com/node/17730360

Slide 1.14
Figure 1.5 The market/organization mix depends on the particular information
requirements of the situation

Slide 1.15
5. Information
The actual mix of coordination mechanisms that we will observe in
any situation will depend mainly on the information requirements that
are inherent in that situation. Information is a crucial concept in the
framework, explaining how coordination will take place.

Slide 1.16
Figure 1.6 Environment as context for the market/organization mix

Slide 1.17
6. The environment and institutions
The context in which trade offs between market and organizational
coordination are made.
The broad concept of the environment includes many dimensions.
They are not only economic in nature, but may also be social,
political, cultural or institutional.
Organizations not only adapt to their environment, but are also
shaped by pressures from the environment and may also be selected
by their environment.

Slide 1.18
The environment and institutions
Organizations do not operate in a vacuum, but live in an environment
that:
provides the conditions for particular organizations to be created
Shapes all organizations by exerting economic, social, political and
other pressures
 is also the ultimate selection mechanism for determining which
organizations can survive and be successful (while other organizations
are selected out and perish).

Slide 1.19
Figure 1.7 Environmental pressure and selection codetermines market/
organization mix

Slide 1.20
Summary
The basic conceptual framework takes the division of labor in society as its
starting point. The division of labor leads to specialisation, which allows
efficiency gains to be made. With increasing specialization, however, there is a
corresponding need for coordination. Coordination is necessary in order to
arrange the vast network of exchange between specialized economic actors.
Two ideal types of coordination of exchange transactions: markets and
organizations. Markets use the price system as the coordinating device, while
organizations use non-price systems such as authority. In practice, both ideal
types of coordination are usually mixed. The actual mix found in any situation will
depend mainly on the information requirements of that situation.
Finally, we have argued that markets and organizations are embedded in an
environmental context and an institutional framework. Therefore,
environmental and institutional factors will codetermine the trade-off between
market and organizational coordination.

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