Organizational Economics

Organizational Economics,

Organizational Economics Definition:

Organizational economics is a branch of applied economics that studies transactions within individual companies, as opposed to transactions within large markets. Organizational economics is divided into three main sub-areas: agency theory, transaction cost economics, and ownership theory. Organizational economics courses are usually taught at the graduate or doctoral level.

  • Organizational economics is used to study transactions within individual companies and to determine management strategies for resource management.
  • It is divided into three main topics: agency theory, transaction cost economics, and ownership theory.
  • All three theories offer ways to justify motivational and critical decisions in an organization.

Literal Meanings of Organizational Economics


Meanings of Organizational:
  1. About the organization or how it is configured.

  2. In terms of action, explain something.

Sentences of Organizational
  1. Head of organization

  2. He has great organizational skills


Meanings of Economics:
  1. The branch of knowledge that deals with the production, consumption and transfer of wealth.

  2. The state of a region or group in material prosperity.

Sentences of Economics
  1. They are more likely to acquire this store of knowledge through a degree in economics at school.

Synonyms of Economics

investment, fiscal matters, business, accounting, economics, pecuniary matters, commerce, money matters, financial affairs, banking, money management

Organizational Economics,

Organizational Economics Definition:

  • Organizational Economics means: Seasonal economics is a branch of applied economics that studies transactions within individual firms, as opposed to transactions in a broader market. The economics of globalization are divided into three main sub-sectors: agency theory, transaction cost economics, and property rights theory. Integrated economics is usually taught at the postgraduate or doctoral level.

    • Management economics is used to study transactions in individual companies and to determine management applications for resource management.
    • It is divided into three main topics: agency theory, transaction cost economics, and property rights theory.
    • Together, the three theories provide an appropriate analysis of motivational and critical decisions in a nation.

Literal Meanings of Organizational Economics


Meanings of Organizational:
  1. In connection with the organization or the way it is involved.

  2. It refers to the process of organizing something.

Sentences of Organizational
  1. President of the organization


Meanings of Economics:
  1. The condition of an area or group in terms of material wealth.

Sentences of Economics
  1. Responsible for the island's simple economy

Organizational Economics,

What is The Definition of Organizational Economics?

Clay Halton is an associate editor at Investopedia and has worked in the financial publishing industry for over three years. For the most part, he writes and edits content on personal finances, emphasizing LGBTQ finance.

  • Management economics is used to study transactions within individual firms and to explain management applications for resource management.
  • It can include a variety of theories and theories, including agency theory, transaction cost economics, and property rights theory.
  • Knowledge of educational economics allows an effective analysis of motivations and important decisions in education.

Literal Meanings of Organizational Economics


Sentences of Organizational
  1. He has a great sense of organization.


Meanings of Economics:
  1. The branch of knowledge that deals with the production, use and transfer of wealth.

Organizational Economics is a working group that investigates the institutions that regulate non-market transactions, such as those between businesses, government agencies, and non-profit organizations. It also addresses the firm’s borders and the function of contracts and other institutions that serve as intermediaries in transactions between businesses.

What is Organizational Economics

Organizational economics studies organizations’ nature, design, and performance, mainly managed ones such as commercial corporations, using economic theory and tools. Several notable economists addressed organizational challenges over the first two centuries of the study, but the profession as a whole paid little attention to them.

However, in the 1970s, a group of essential contributions created the groundwork for the contemporary discipline. As a result, economists (often in business schools) have produced a large and growing literature directly addressing organizational issues

Organizational Economics Fundamentals

Organizational economics helps develop:

Popular Methods of Organizational Economics:

:black_small_square: Agency theory studies the consequences of knowledge asymmetry between company owners, managers, and workers.

:black_small_square: Transaction cost economics studies the role of transaction costs in organizational structure and choices, such as information, negotiation, contract enforcement, and relationship-specific investments.

:black_small_square: The property rights approach: Investigating the allocation of decision rights inside and between organizations based on the inadequacy of contracts.

The Deepwater Horizon and Organizational Economics

  • Applying organizational economics may expose both the shortcomings of a present management style and potential avenues for improvement.

  • Understanding the motives and choices that contribute to operational decisions inside an organization may be gained by looking at the subfields that form this technique.

  • Organizational economics, for example, might be used to examine why the 2010 BP oil leak in the Gulf of Mexico occurred and how a similar catastrophe could be avoided in the future.

  • Using the agency theory subfield, for example, an evaluation may be made of the incentives before the 2010 BP oil leak, what motivated those decisions leading up to the catastrophe, and if the agents involved felt forced to work under those circumstances.

  • Furthermore, why the principals at BP may or may not have been aware of the concerns and motives at play with the agents on the oil rig might be investigated.

The Evolution of Organizational Economics

:black_small_square: For many years, the study of microeconomics was concerned mainly with the connection between enterprises and their external environment, including customers, suppliers, rivals, and regulators.

:black_small_square: Internally, it was expected that a corporation could calculate the costs of any pattern of exchanges with the outside world to make the optimum production and marketing choices.

:black_small_square: However, the management of the actual industrial processes was not viewed as a problem of economics in and of itself. Instead, these challenges were tackled as organizational behavior and design issues to allocate better, manage, and inspire people, much like a military unit.

Reasons to Grow a Economical Business

  • Businesses often offer a variety of goods and services, and the assortment of goods and services given changes throughout time.

  • Several variables inspire changes in this composition, leading to either growing a company by expanding the variety of products and services supplied or contracting the firm by halting production and sale of particular goods and services.

  • The terms economies of scale (cost per unit reduces as volume grows) and economies of scope (cost per unit lowers as volume increases) are used interchangeably (costs per unit of different goods can be reduced by producing multiple products using the same production resources). Businesses often expand to capitalize on these economies.

  • In marketplaces with few sellers, each of whom provides a significant portion of the products or services offered, sellers have the edge over buyers in exacting higher prices. Businesses may often buy out rivals or boost production to develop market strength to drive competitors out of the seller market.

  • Many firms offer intermediate items rather than finished goods. Their consumers are other firms that combine or improve the products or services they acquire to deliver additional goods or services.

  • Business is a dangerous possibility because of the significant uncertainties regarding future expenses, revenues, and profits and the necessity for enterprises to commit resources before these uncertainties are addressed.

Value Chain Classification of Business Expansion

Value Chain Classification of Business Expansion

As previously said, many firms provide items or services designed to assist other businesses in manufacturing their goods and services. Many of the items we buy as individuals result from a series of industrial activities that may include many companies.

Suppose we trace the final products backward via the intermediate goods obtained and used. In that case, we can generally see the participating companies in a manufacturing process as a network of production activities or a series of production stages.

Integrating Horizontally

Horizontal integration occurs when a company either extends or raises the amount of its current industrial activity. Consider a television manufacturer at the assembling stage of its value chain.

Horizontal integration would occur if the business purchased another television set maker. Because the two goods and the activity inside both value chains are so similar, if the firm decides to build computer displays, the product would be a form of horizontal integration.

Integrating Vertically

When a company extends into a new stage of a value chain in which it already works, this is vertical integration. Assume a television manufacturing company has been obtaining the electronic circuit boards.

It uses in its television set products but wishes to either purchase the supplier or create a new business to manufacture those components for itself. This is an example of vertical integration.

Vertical integration will often extend to an adjacent level in the value chain. When a company moves into a lower step of the value chain, it is performing upstream integration. Downstream integration occurs when the growth occurs at a later level of the value chain.

Firm Transaction Costs and Boundaries

We’ve gone through various reasons why a company would wish to grow. At first, look, growing a corporation is often a wise option with few adverse risks provided the more prominent organization is appropriately managed. In reality, successful firms in the twentieth century often participated in horizontal and vertical integration and even became conglomerates due to such thinking.

However, as many of these great organizations discovered, it is easy to grow too large, complicated, or diverse. As a firm becomes more extensive and more complicated, it needs a more complex management structure.

There must be some specialization among managers, just as there is in its workforce. Because each manager only knows a tiny portion of the corporation’s activities, excellent communication between managers is required to capitalize on the prospects of integration and amalgamation. This needs more management to manage the managers.

Characteristic Organizational Informatics Issue
Purpose To explain efficiencies for optimized, scale-scope, learning
Context Business networks and inter-organizational relations
Viewpoint ganizations and systems Organizational informatics studies applications embedded in the interaction
Approach Economic organization
Technology knowledge management CALS based on product state models and the information systems of distributed
Business opportunity Development of new business models based on networks

Pricing of Transfers

The profit center concept views a corporate division as an independent firm inside a corporation. However, having several divisions in a business is often due to vertical integration, which means that certain divisions provide products and services to other divisions in the enterprise.

If the two divisions in an exchange are considered independent firms, Even if the purchasing division does not provide real cash, some value measurement for the transaction is required to function as income for the selling division and expense for the acquiring division. A transfer price is the set value attributed to the traded object.

Employee Incentives

Previously, we discussed how to use proper transfer pricing to incentivize divisions within a big firm. As stated in the opening to this chapter, economists have approached this issue from a novel angle in recent decades.

The old approach to motivating inside a division or small corporation was often seen as organizational design and organizational behavior issues.

Once an employee consented to work for pay or wages and benefits, his services were subject to management’s direction within the realm of human resource policy in terms of hours worked and working conditions.


Economists in other fields (beginning with industrial organization and labor and now including corporate finance, development, political economy, and international trade) have asked organizational questions and applied organizational results within their disciplines.

Frequently Asked Questions

People usually ask many questions about Organizational Economics. A few of them are discussed below:

1. What is the purpose of economic organization?

Organizational economics helps develop human resource management policies, determine how a firm should be organized, analyze the firm’s size, scope, and boundaries, set appropriate compensation, pay, and incentives, assess business risk, and make, analyze, and improve management decisions.

2. What is one of the primary goals of economics study?

Economics attempts to tackle the issue of scarcity, which occurs when human needs for goods and services outnumber available supplies.

3. What are the three most important economic organizations?

There are three central international economic institutions: the World Trade Organization (WTO), the International Monetary Fund (IMF), and the United Nations Conference on Trade and Development (UNCTAD). World Trade Organization (WTO): The WTO was established in 1995 to replace the General Agreement on Tariffs and Trade (GATT), in effect since 1948.

4. What are crucial economic figures?

Many renowned economists have existed, some of the more well-known names are Adam Smith, David Ricardo, Karl Marx, John Maynard Keynes, Friedrich Hayek, and Milton Friedman.

5. What is the history of the IMF?

In the aftermath of the 1930s Great Depression, the IMF was founded in 1944. The 44 founding members intended to establish a framework for international economic cooperation. Today, its membership includes 190 countries, with workers from 150 countries.


The results are that Organizational Economics is valuable in expanding theory development and empirical research in organization theory, but that in order for OE to fully achieve its potential, it must rely on organization theory to improve theory building and broaden its reach.

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