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Managerial Economics - Essay Example

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In the paper “Managerial Economics” the author analyzes the Coarse theorem, a theorem which is associated with a Nobel Prize Laureate, Robert Coarse, who sought to describe the economic efficiency of economic allocations or outcomes while faced with externalities…
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Managerial Economics
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Managerial Economics

Download file to see previous pages... In general, the Coarse theory is a legal and economic theory which affirms that, where complete competitive markets with no transaction costs are, an efficient set of outputs and inputs from and to the production-optimal distribution will be selected. This is without paying regard to how property rights are being divided. The parties involved can negotiate or bargain terms beneficial to them than an outcome of a property rights assigned to them (Mankiw, 2007). This is to say that they are not completely obliged by the property rights to trade for as long as they are able to trade and produce an outcome that is mutually advantageous to all of them. For this to exclusively occur, then the cost of bargaining or any cost associated with it such as cost of meetings must be extremely costless as any cost at all will influence the outcome of the bargain. However, no exact definition of the Coarse theorem has been established (Sloman & Sutcliffe, 2003).Theory of the FirmEconomically, a firm is referred to as a legally organized and recognized organization that is designed with the main purpose of providing goods and services to the consumers. Coarse in establishing his theory, used applications based on the activities of the firm and related the same to the planning capability of a firm’s management. This might be metaphorically perceived as the firm being an island of planning in a sea of markets. When firms make decisions regarding production of the goods or services they produce., they do so guided by certain principles and which are as described by this theory proposed by Ronald Coarse (Rasmusen, 2007).
This theory of the firm consists of several economic theories that seek to describe, explain and predict the nature of a firm. It seeks to answer questions about the existence of the firm, its behaviors and structures, their organization, the boundaries of firms and the heterogeneity of the performance of the firms.
In reality, most firms are known to exist as alternative systems to the market-price mechanism if it can produce efficiently in a non-market environment. Consider an example of the labor market: it can be very costly for firms to produce efficiently if they have to hire and fire their employees based on the demand and supply conditions. Similarly, a shift by employees from one company to another everyday may be seen as costly or when companies shift each day in search of new suppliers (Williamson et al, 1991). This is because any action involves costs in it hence, the essence of firms’ transactions costs. The safest modality for the firm in such scenarios is to engage in long term contracts with either their workers or suppliers so as to be able to minimize on costs and at the same time maximize on the property rights. ...Download file to see next pagesRead More
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