Question

1. According to a well-known economist Oliver Williamson, there are environmental factors ( i.e. uncertainty and number of firms) and human factors (i.e. bounded rationality and opportunism) that affect transaction costs across markets and firms.

1. Explain why firms may produce their own resources internally and not rely on the markets when there are great uncertainty.
2. Explain why when the number of firms supplying factors of production is small, firms do not want to engage in long term contracts with these suppliers.

Answer 1

Ans- i) The firms prefer to produce their resources internally and do not rely on the market when there is great uncertainty becuase they get a advantage that is reduced costs, enabling businesses to improve their price competitiveness in global markets.They can get a place in the global market where they can promote their products.

ii) The number of firms when supplying factors of production is small,firms do not want to engage in long term contracts with these suppliers because disadvantages to long term contract is that you are also locked into that contract for a period that may not be to your liking. Many contracts on a long term basis are generally have paid in arrears.