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Using Prices For Coordination and Motivation

Prices can be used to effectively coordinate large-scale economic organization and motivate individuals. The fundamental theorem of welfare economics states that competitive equilibrium results in an allocation where there is no other allocation that all consumers would unanimously prefer. Prices provide information to producers and consumers that allows resources to be allocated efficiently without central coordination.

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Sonia Walia
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472 views

Using Prices For Coordination and Motivation

Prices can be used to effectively coordinate large-scale economic organization and motivate individuals. The fundamental theorem of welfare economics states that competitive equilibrium results in an allocation where there is no other allocation that all consumers would unanimously prefer. Prices provide information to producers and consumers that allows resources to be allocated efficiently without central coordination.

Uploaded by

Sonia Walia
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Using Prices for Coordination and Motivation

Introduction
Price is bundle of information. In modern economy the problem of supplying the right goods at right time at right place to right people, when the consumers are at a widespread area, requires major feat as coordination. More over individuals must be motivated to do their parts in the coordinated plan.

Prices and Coordination


Prices can be used to achieve effective organization in large scale decision making, where decision makers are asked to value limited resources by placing value on each price used. Our purpose is in this chapter to study how far a price system can go in solving coordination problem of economic organization.

Fundamental Theorem of Welfare Economics


There is no other allocation consistent with the resources and technological opportunities that consumers would unanimously prefer. There are two aspects, first, knowing only local information and system wide prices is enough for each producer and supplier

The Neoclassical Model of a Private Ownership Company


The Individual Consumer The Individual Consumption Plans The Firm Economies and Allocations Competitive Equilibrium

The Theorem
Let P be the list of Prices at which various goods trade. B is the list indicating the Quantity that a consumer buys. S is the list indicating quantities that a consumer sells of each
good or services traded in the market.

I is the number of inputs used for production O


is the number of outputs produced.

Fundamental Theorem of Welfare Economics


If ( P,B,S,I,O) are price lists and plans of a competitive equilibrium, then the resulting allocation is efficient In other words, If (B,S,I,O) is a set of competitive equilibrium plans and (B`,S`,I`,O`) is any other set of plans that all consumers like at least as well and that at least one consumer strictly prefers, then (B`,S`,I`,O`) I not technically feasible.

Scope of Neoclassical Model

Incentives and Information under Market Institutions


Incentives in Markets

Informational Efficiency of Markets

The Neoclassical Model and Theories of Organization


Market Failures Increasing Returns to scale Externalities Missing Markets Search, Matching and Coordination Problems

Using Price System within Organizations


Patterns of Internal Organization in Firms Transfer Pricing and Multidivisional Firms Transfer Prices and Market Prices

Transfer Pricing With a Competitive Outside Market

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