A transaction cost is basically just the cost for each party in an economic, or financial exchange. While growing up I never really understood how many costs that there are involved in an every day setting. I was used to my parents buying me meals, my clothes, etc. I started to realized that my parents were not going to support me forever when I got into a car accident in high school. First, my parents made sure that I wasn't injured or anything, but their very next statement is what made things very clear to me, "Do you realize that your insurance is going to go up?" At the time, that question really didn't register, so I waited for their next statement, "You are paying for any damage that insurance doesn't cover out of your own wallet." By this time I did have a job, but it was only on the weekends, and I really didn't have too much money saved. The damage came out to around $1500, all of which I had to pay. From then on, I started to appreciate money a little bit more.
The next time that transaction costs started to affect my life was when I first set foot on campus here at the University of Illinois. I came to school with a lot of money saved from various jobs that I had in my high school career. The amount of money in my bank was more than I had ever possessed, and for that reason I was pretty comfortable that it would last me throughout the year. Little did I know that groceries only last a couple of weeks at a time, eating out is quite expensive, and not to mention, socializing can be extremely pricey as well. My funds started to trickle away as the semester went on. Each large transaction that I made at school was followed by a call from my dad saying something along the lines of, "How did you spend a hundred dollars at Wal-Mart?" My main point that I am trying to make here is that it costs a lot of money to live. Necessities start to mix with wants, and that is when transaction costs become more and more difficult to deal with.
This week in class we had some very interesting discussions, not only about rules of the class, but also about the structure of organizations, and the balance of powers between different employees within a certain company. I found the discussion about corporate America to be very interesting because I worked in an office that showed chain of command very well. Each person had their responsibilities, some people having more than others, and some people having more important responsibilities than others. That is how an organization is made to function fluently, and smoothly. There is a top tier level of employees (CEO, CFO, President, Vice President) then their is a middle tier of employees (Accounts Recievable, Sales, Controller, Marketing, etc.) and finally their are lower tier employees and interns. The difference in pay between each job title is different for every company, because some companies create more revenue than others, some companies are publicly traded, etc. I think that these types of real life business conversations will benefit all of the students in our class when we venture out into the corporate world. We touched on entrepreneurship for a little bit in class as well, and I am excited to look into that subject further as our class moves along.
This essay will be very helpful to the rest of the class because it highlights that we need to distinguish between transaction costs, on the one hand, and production cost, on the other. We also need to talk some about who bears the costs.
ReplyDeleteYour accident example shows, in the language of M&R, that markets were incomplete. You and your parents probably didn't discuss how this would work out ahead of time. So perhaps you didn't expect to bear the cost. Nonetheless, I wouldn't call that a transaction cost. It is the loss as a result of the accident. Incidentally on that one, my younger son also had a car accident last year. My wife and I paid, for the damages on the car, but my son drove less afterward. That's where the transaction cost may be found, to regulate what would happen in the case of a second accident.
I liked your car accident and Walmart examples. They highlight the importance of money very well. By using Professor Arvan's comment as a guide, I'd say your transaction costs from Walmart trips could include extraneous costs that aren't included in a direct transaction between buyer and seller. In this case, I believe transaction costs would include the time it takes to get to and from the store on each trip, and the gas costs as well.
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