Economics of

Business Decisions
Revision

Assessment

100% final exam.

2 hour-paper.

Answer Question 1 in Section A (40%) and choose

TWO questions out of six in Section B (60%).

Section A short questions. Nature: Define and

explain.

Section B long essay. Nature: Analysis and

discussion.

Lecture 1
Introduction to Business Decisions and objectives.

What are the definition of a firm (objectives of firm)

according to Neo-classical Economics?
Profit-Maximization
What are the objectives/motivations of the firm according to
Managerial theories?
Sales Maximisation (Baumol)
Growth maximisation (Marris)
Managerial utility (Williamson)

Lecture 2
What is transaction costs?
External transaction cost (transactions with outside markets)
--- additional costs to the usual cost of production?

Issues pertaining to contract costs, hold-ups and asset

specificity.

How do firms deal with transaction costs?

Issues of mode of organising production?

Lecture 3
Transfer

Pricing what is it?

Implication

will affect bigger firms with

many divisions?

Undermine

vertical integration strategies?

Lecture 4

Agency costs --- principal-agent problem framework in

organisations..

Why incentives and motivations needed?

What about monitoring?

Incentives to align the objectives of employees and

employers in organisations ---

Incentive tools like Pay for performance, promotion

etc..

Lecture 5
The

Behavioral Theory of the Firm

Different

from Neo-classical theory of the firm

Satisficing

it mean?

Issues

instead of maximising. What does

of routines, bounded rationality, conflicts

in organisations, multiple goals.

Lecture 6

Resource-based theory of firm.

Issues of sustaining competitive advantage by firms. How? Key

& Valuable resources.

Firms are not homogenous instead, they are heterogeneous

each are endowed with different resources

Possession of key and rare resources the main reason why

some firms always ahead!

Value capturing/sustaining competitive advantage. How?

Lecture 7

Boundaries of the firm 1--- vertical integration

Vertical expansion vs contractions (outsourcing)

Forward and backward integration.

Why extend ones vertical boundary? Efficiency

concerns, strategic moves, agency theory explanation,
resource-based arguments? Others?

Lecture 8

Boundaries of the firm 2 --- horizontal integration.

Scale, scope and learning economics.

Related diversification also applicable.

Why extend ones horizontal boundary? Efficiency

concerns, strategic moves, managerial motives
(e.g. Baumols sales maximisation or Williamsons
utility max. model?), resource-based arguments?
Others?

Lecture 9

Boundaries of the firm 3 diversification.

Related (economies of scope) better than unrelated

(pooling of risk)?

A strategy that is generally unfavourable or otherwise?

Empirical evidence on this?

Why diversify? Efficiency concerns, strategic moves,

managerial motives (e.g. Marris growth max. theory?),
resource-based arguments? Others?

Lecture 10

Boundaries of the firm issue --- firms can pursue

changes through M & As.

Can be horizontal, vertical

(diversification) expansions.

Efficiency gains versus synergies (firm specific?)

versus environmental factors.

Firms also look at divestment strategies --- reducing

ones boundaries. Motivations for this?

or

conglomerate

Readings
See module outline.
Textbooks

Lecture

Articles

notes

Good luck!