SECOND LESSON

ECONOMY AND MARKET

Enterprise Economics and Management

UNIVERSITA' CAMPUS BIO-MEDICO DI ROMA Facoltà di Ingegneria
www.unicampus.it
 CONTENT

1. Recap about the First Lesson

2. The “Market” Economy (Free Market)
3. The Ideal Market , and the conditions for the Equilibrium
4. The principles of Efficient, Effective, Equitable Market.
5. Competitive Markets
6. Market Distortions (Comportamenti Distorsivi del Mercato)
7. Failures of the Market

Enterprise Economics and Management

UNIVERSITA' CAMPUS BIO-MEDICO DI ROMA Facoltà di Ingegneria
www.unicampus.it
 Recap of First Lesson Concepts

ENTERPRISE (1/2)
• Economic
• Activity
• Organized
• To Produce, Transform, Trade GOODS or SERVICES
• In Coherence with the Social Object
• To create ECONOMIC VALUE for the STAKEHOLDERS

Comparison between ECONOMIC VALUE and PROFIT

Difference between STAKEHOLDERS and SHAREHOLDERS

PROFIT = MAXIMIZING THE ACTUAL VALUE of the expected cash flows

Enterprise Economics and Management

UNIVERSITA' CAMPUS BIO-MEDICO DI ROMA Facoltà di Ingegneria
www.unicampus.it
The Concept of DISCOUNTING (ACTUALIZATION) :

• In simple interest regime (regime di Capitalizzazione Semplice)

C0 = Cn / (1+ in)

• In compound interest regime (regime di Capitalizzazione Composta)

C0 = Cn / (1 + i) n

Enterprise Economics and Management

UNIVERSITA' CAMPUS BIO-MEDICO DI ROMA Facoltà di Ingegneria
www.unicampus.it
 FREE MARKET ECONOMY

MARKET : is the context where, through the free operation of the

Economic Agents in a competitive regime, the System of the Prices,
without the need of additional interventions, reaches a CONDITION
of Equilibrium (Condizione di Equilibrio)

THE PRINCIPLE OF THE INVISIBLE HAND (ADAM SMITH)

DIFFERENT POSSIBLE “EQUILIBRIUM” CONDITIONS :

• John Nash (INDIVIDUALS EQUILIBRIUM) EQUILIBRIO tra i SINGOLI
AGENTI
• Pareto-efficient EQUILIBRIA : COALITIONS EQUILIBRIA EQUILIBRIO
DI COALIZIONE

Enterprise Economics and Management

UNIVERSITA' CAMPUS BIO-MEDICO DI ROMA Facoltà di Ingegneria
www.unicampus.it
 FREE MARKET ECONOMY

THE DILEMMA OF THE PRISONER :

Two prisoners are retained in two different, not communicating jails  ; they
are accused of the same crime.
Their possible defensive strategies are the following :
SPEAK (accusing the other prisoner)
BE SILENT
If they both remain silent the judge will give them both a light penalty (2
years) ; If one prisoner SPEAKS and the other REMAINS SILENT the
former will have no penalty (0) and the latter a heavy penalty (10 years); if
they both SPEAK they will deserve an intermediate penalty (4 years)
 

Enterprise Economics and Management

UNIVERSITA' CAMPUS BIO-MEDICO DI ROMA Facoltà di Ingegneria
www.unicampus.it
 FREE MARKET ECONOMY

The situation can be summarized as follows :

 
Strategy Prisoner 1 : S1(p,t) Strategy Prisoner 2 : S2(p,t)
(p=speaks, t=is silent) (p=speaks, t=is silent)
Utility Functions Pris. 1 Utility Functions Pris.2 :
u1(p1, p2) = 4 u2(p1, p2) = 4
u1(p1, t2) = 0 u2(t1, p2) = 0
u1(t1, p2) = 10 u2(p1, t2) = 10
u1(t1, t2) = 2 u2(t1, t2) = 2
 

Enterprise Economics and Management

UNIVERSITA' CAMPUS BIO-MEDICO DI ROMA Facoltà di Ingegneria
www.unicampus.it
 FREE MARKET ECONOMY

 
For both prisoners the strategies “p” have, individually (Nash
Equilibrium) A BETTER UTILITY, because the total risk of prison is
equal to 4, while the strategies “t” have a total risk of 12.

In a COALITION view, on the contrary, the strategy “t” is the best one.

Enterprise Economics and Management

UNIVERSITA' CAMPUS BIO-MEDICO DI ROMA Facoltà di Ingegneria
www.unicampus.it
 OFFER Curve

P2

PE PE
 

P1
REQUEST Curve

Q1Off Q2Dom QE Q2Off Q1Dom

q
       

Enterprise Economics and Management Q

UNIVERSITA' CAMPUS BIO-MEDICO DI ROMA Facoltà di Ingegneria

www.unicampus.it
 Toreach the Equilibrium Price (Prezzo di
Equilibrio) the market must be perfectly
competitive,
 
and and this can only happen if many
conditions are verified, among which one of the
most important is that the Information must be
perfect.    

Enterprise Economics and Management Q

UNIVERSITA' CAMPUS BIO-MEDICO DI ROMA Facoltà di Ingegneria

www.unicampus.it
 PERFECT COMPETITION
A large number buyers and sellers No barriers of entry and exit

Perfect factor mobility Perfect information

Zero transaction costs Profit maximization

Homogeneous products Non-increasing returns to scale

Property rights Rational buyers

No externalities
.
Contestable Markets (Mercati Contendibili)

Those markets that, even though they do not respect all

the conditions for a perfect competition, can be
considered CompetitiveEnterprise
Markets: Economics and Markets
UNIVERSITA' CAMPUS BIO-MEDICO DI ROMA
www.unicampus.it
. Contestable Markets (Mercati Contendibili)

Those markets that, even though they do not respect all the conditions for
a perfect competition, can be considered Competitive Markets: these
markets are featured by easy new entries and exits, without losing assets.
In such a case every new entry to the market has an effect on the
behaviours of the Competitors.

Enterprise Economics and Markets

UNIVERSITA' CAMPUS BIO-MEDICO DI ROMA
www.unicampus.it
 Price Elasticity of Demand

= ( dq / q ) % : (dp / p ) (%)

= (dq / dp ) x (p / q)

Elastic Demand
Anelastic Demand See next
slide
Fully anelastic demand

Enterprise Economics and Markets

UNIVERSITA' CAMPUS BIO-MEDICO DI ROMA
www.unicampus.it
 E = inf.

Enterprise Economics and Markets

UNIVERSITA' CAMPUS BIO-MEDICO DI ROMA
www.unicampus.it
THE PRINCIPLE of EFFECTIVENESS ( EFFICACIA) of
EFFICIENCY (EFFICIENZA) , the PRINCIPLE of OF FAIRNESS,
( EQUITA’)

Effectiveness of a Company = ability to match its objectives

(such objectives, according to our definition, are represented
by the Creation of Economic Value for the Stakeholders)

Efficiency of a Company = ability to pursue choices for which no

better alternatives exist (Pareto-efficient : at least one operator
prefers that choice , and none considers it detrimental))

Efficient Organizations make efficient choices

Enterprise Economics and Markets

UNIVERSITA' CAMPUS BIO-MEDICO DI ROMA Facoltà di Ingegneria
www.unicampus.it
Fairness (Principle of Equity) : ability to have the right
distribution of the economic surplus generated by the
Enterprise

Enterprise Economics and Markets

UNIVERSITA' CAMPUS BIO-MEDICO DI ROMA Facoltà di Ingegneria
www.unicampus.it
 TRANSACTION COSTS

The Transaction Costs are the costs to be added to the pure

Production and Distribution Costs of Goods to take into
account that THE MARKET IS NOT A “Perfect
Competitive Market” .

The existence of the Transaction Costs is linked to the non-

existence of the Perfectly Competitive Market.
These costs justify the ORGANIZATIONS (even though the
Organization, in turn, should be also aimed at minimizing
the Transaction Costs)

Economia e Gestione dell’ Impresa

UNIVERSITA' CAMPUS BIO-MEDICO DI ROMA Facoltà di Ingegneria
www.unicampus.it
 MARKET DISTORTIONS. FAILURES OF THE
MARKET

A market distortion is any event PREVENTING THE

MARKET FROM REACHING THE EQUILIBRIUM
PRICE THAT WOULD HAVE BEEN ACHIEVED IN
CASE OF perfect competition and state enforcement
of legal contracts and the ownership of
private property.

• Such behaviours create an inefficient allocation of the resources

(inefficient equilibrium)

Enterprise Economics and Management

UNIVERSITA' CAMPUS BIO-MEDICO DI ROMA Facoltà di Ingegneria
www.unicampus.it
Main typologies :

Differential taxation and subsidies

Asymmetric or Incomplete information
Monopoly, oligopoly
Criminal coercion or subversion of contract conditions
Illiquidity of the market (lack of buyers, sellers, product, or
money),
Collusion among market participants,
Price supports or subsidies,
Failure of government to regulate non-competitive market (Public
Goods and Services, Merit goods and services etc.)
Economia e Gestione dell’ Impresa
UNIVERSITA' CAMPUS BIO-MEDICO DI ROMA Facoltà di Ingegneria
www.unicampus.it
Economia e Gestione dell’ Impresa
UNIVERSITA' CAMPUS BIO-MEDICO DI ROMA Facoltà di Ingegneria
www.unicampus.it
Economia e Gestione dell’ Impresa
UNIVERSITA' CAMPUS BIO-MEDICO DI ROMA Facoltà di Ingegneria
www.unicampus.it
Economia e Gestione dell’ Impresa
UNIVERSITA' CAMPUS BIO-MEDICO DI ROMA Facoltà di Ingegneria
www.unicampus.it
Economia e Gestione dell’ Impresa
UNIVERSITA' CAMPUS BIO-MEDICO DI ROMA Facoltà di Ingegneria
www.unicampus.it