The Nature of the Firm Author: Ronald H. Coase Economica Vol. 4 (November 1937) pp. 386-405

1
The Nature of the FirmAuthor Ronald H.
CoaseEconomica Vol. 4 (November 1937)pp. 386-405

• Presented by Danielle Jones

2
Background

• Born in 1910 in London, England
• On faculty at London School of Economics when The
  Nature of the Firm was published
• Father of transaction costs economics
• Currently Professor Emeritus of Economics at
  University of Chicago Law School
• Nobel Memorial Prize in Economics in 1991
• Still alive and conducting research

3
Problem

• Economic theory fails to clearly state its
  assumptions
• Economic analysis tends to begin with the
  individual firm
• Economists and people in the real world have
  different definitions of a firm

4
Purpose

• Definition and clarification of the firm
• To provide a definition that is realistic and
  tractable (manageable)
• To clarify when resources are allocated by the
  price mechanism (the market) and when they are
  allocated by the entrepreneur (firm)

5
Why does the firm exist?

• There are market (transaction) costs associated
  with using the price mechanism to organize
  production
• Price discovery costs
• Contract and negotiation costs
• Regulation costs (taxes)
• Uncertainty costs
• A firm (under the authority of an entrepreneur)
  can coordinate resources and minimize transaction
  costs

6
Definition of firm

• the system of relationships which comes into
  existence when the direction of resources is
  dependent on an entrepreneur (p. 393).

7
What determines firm size?

• Amount of transactions
• Mistakes
• Failure to utilize factors of production
  properly
• Waste of resources
• Supply price of factors of production

8
Cost curve of the firm

• As firm gets larger, there may be decreasing
  returns to the entrepreneur
• Loss in efficiency
• The firm will engage in the number of
  transactions where the costs of doing so in the
  firm are equal to the transaction costs in the
  market or to the costs of organizing by another
  entrepreneur
• Also determines number of products produced by
  the firm

(Washington, 2013)
9
Application of the firm to the real world

• Looks at legal relationships of master and
  servant (employer and employee)
• Servant must be under the duty of rendering
  personal services to the master
• Master must have the right to control the
  servants work

10
Tractability (manageability) of the firm

• The principal of marginal returns works
  smoothly with determining firm size
• At the margin, the costs of organizing within the
  firm will be equal either to the costs of
  organizing in another firm or to the costs
  involved in leaving the transaction to be
  organized by the price mechanism