Coase - The Nature of the Firm

Question 1

firms

Answer 1

are assumed to exist, and are characterized by production functions, cost curves, demand curves, etc.

Question 2

Observations of Firms

Answer 2

• firms transform inputs into outputs (so do individuals)
• firms are characterized by employers and employees (so are market transactions)
• firms are legal entities

Question 3

One can imagine production w/o firms

Answer 3

individual traders exhanging capital and labor for payment, these being combined and marketed.

Question 4

Organizations may seem to form “from a distance”

Answer 4

cartel-types of trade made on a consistent basis to achieve some purpose, but we would probably not characterize these as firms.

Question 5

Coordination of economic activity

Answer 5

via prices/bargaining.

Question 6

Coase’s observation:

Answer 6

There are costs to using the price mechanism for coordinating economic activity. “transaction costs” or “marketing costs”

Given this, alternative institutional arrangements may coordinate economic activity at a lower cost. For example, it may be less costly for an individual to direct how resources should be used.

Question 7

Firms exist to

Answer 7

economize on the cost of coordinating economic activity.

Question 8

Firms

Answer 8

are characterized by the absence of the price mechanism.

Question 9

Sources of transaction costs:

Answer 9

• costs of learning prices
  
  • cost of negotiating contracts
  • cost of writing contracts, etc.

This is a transaction-based theory. If it is more efficient for a transaction to be conducted under alternative institutions, price mechanism will not be used. Coordination by fiat.Institutions arise in order to economize on transaction cost

Question 10

Scope of the Firm

Answer 10

If it is more efficient for a transaction to take place within the firm than under some other institutional arrangement, then it will take place within the firm.

If not, then it will take place under some other institutional arrangement:

• in another firm
  - mediated by the market.

Question 11

What limits the scope of the firm?

Answer 11

• increasing marginal costs of organizing more transactions within the firm.
  
  • decreasing returns of managerial ability (knowledge, computation limits..)