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Economics of Strategy - Essay Example

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Subprime debacle is an important happening that needs analysis to avoid it in future or to minimize the adverse affects of it on financial companies and organizations. However, the organizations that faced losses in subprime debacle are coming out with fresh investments, as the customers are 'bloodied but not unbowed' according to James C…
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Download file "Economics of Strategy" to see previous pages... As the service producing industries in US account for 81 percent of all private sector payrolls, economic growth in the sector can be a boost for the investments in credit. However, as the extent of the credit market impact is not clear, the investments in credit business may result in attracting higher interests for home loan customers or credits being tightened.
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The overall consumer spending that will be a result of steady gains in jobs and incomes can neutralize the impact of subprime debacle. However, the tight credit may not affect the household sector also as long as labor markets are strong. As service sector companies are adding new workers, the gains in payrolls are a suggestion for the expanding of the operations that supports the household spending. 1
The economy and profitability of economic organizations depend on the transaction costs. In that aspect, the subprime lending is a good opportunity for economic organizations, but the debacle has led the organizations to face the losses. The internal structure, working nature and policy of the economic organizations decide the cost and nature of transactions. As a result, transaction cost economics by Coase decides the structure of the organization and working relations between departments in an economic organization. ...
The afore-mentioned costs depend on the organization of transactions. The efficiency of organization and profitability increases by decreasing the transaction costs and increasing the returns. The first type of costs are the costs coupled with markets that are result of bargaining of independent agents. However, the afore-mentioned have least affect on sub-prime market as they charge higher interest rates from comparatively lower income class. The significant problem in this market is about risk involved in repayment of the loan advanced to the customers. The afore-mentioned problem arises from the second type of costs that incur due to the decisions of the individuals in the company manage to influence decisions for their personal benefits. Minimizing the afore-mentioned second type of costs is very difficult in any type of economic organization, as opposing the decisions is possible only with managing influence costs within the organization. In general, there is not much care taken about internal workings of an economic organization. 2
However, investing in subprime market on a large scale is a decision of internal working and the extent of investment should depend on the economic growth. Many organizations have invested (advanced loans on lesser security) in subprime market, while in a period when the economy is in recession or not recording remarkable growth. The theory of markets controlled by impersonal forces is useful in managing the influence costs within the management, as the managers, who influence the decision of the firm have to take into consideration the market conditions and probable changes in near future. The near future mentioned above should be nearer to the time that ...Download file "Economics of Strategy" to see next pagesRead More
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