TRANSACTION COST APPROACH

TRANSACTION COST APPROACH

TRANSACTION COST APPROACH

Introduction

In order for us to understand what is and how does the approach work, let us look into what we call a transaction cost. According to certain disciplines, particularly in economics, a transaction cost implies an amount of money that has incurred or came upon in making an economic swap.

For instance, a very commonly quoted example by financers, that when investor parties and individuals look up with the intention of selling, circulating or disseminating stocks or shares in the market flow, they shall pay a certain amount or sum to their intermediary, or simply, brokers that shall help them in the process. The cost given to the broker by the investor shall be labeled as the transaction cost borne by the individual stockholder.

Under the rule of modern economics, transaction costs have become uniformly (and perhaps more) crucial than production costs. This is quite an advancement and enlargement considering early economic theories (e.g., the perfect market economy model) that deliberated solely on cost of production, assuming that transaction costs were not available or simple non-existent.

When examining a transaction of potentiality, it is viable to understand that transaction costs can be considerably more impressive. At least two definitions of "operating expenses", have been commonly used in understanding and intending the concept of transaction costs. Operating expenses generally, in the light of the works given by Stephen C. Cheung, are not credible, i.e. all costs associated with the existence of the institution.

For Cheng, the term "operating expenses" are not as popular in the economics literature, but are generally termed as "institutional costs." Many economists seem to restrict the definition to exclude the costs of internal organization. The latter definition parallels Coase's premature study of the machinery costs, along with the origin of the term as the Council for Trade in the market.

When defining broadly, many economists question and inquire what the institutions (companies, markets, franchises, etc) to cut down the transaction costs of production and distribution of a product or service. Often these relationships are classified by type of contract in question. This approach sometimes goes under the rubric of New Institutional Economics.

Numerous forms of transaction costs are very popular, well known names including: search and information costs of expenses incurred in determining that the device requires is available in the market, which has a base price low, etc.

In addition, trading costs are the amounts that may or may not be in use to reach an agreement acceptable to and agreed upon by the party in the transaction, the wording of the treaty, and so on.

Development history

The term "transaction costs" are believed to have been coined by Ronald Coase, who used it to develop a theoretical framework to predict a time when some financial responsibilities and obligations will be provided by the companies, so in response to an applied moment in the market on a large scale. However, the phrase, in real terms is missing in his early works to ...