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Sociology 224
February 9, 2010
Introduction
Problem:
Economists often fail to examine the foundations of
economic theory
Coase proposes:
to show a definition of the firm that both:
-corresponds to the real world meaning of the word
-tractable by tools of economic analysis (idea of the
margin and substitution)
-
I. The Economic System
as Treated by Economists
Introduction I. Economic System: Economists vs. Coase II. III. IV. V. Questions
Economists View of
Coases View of
Economic System
Economic System
Price mechanism Outside the firm:
determines the allocation
Price movements direct
of the factors of
production, coordinated
production
through exchange
The process is automatic, transactions on the market
responsive, and elastic: it
Within the firm:
adjusts supply to demand
The entrepreneur directs
and production to
consumption production
Introduction I. Economic System: Economists vs. Coase II. III. IV. V. Questions
…BUT
Questions…
Give a clear definition of what is meant by a
“firm” in economics that is both realistic
(corresponds to general usage) and manageable
for economic analysis. Bridge the gap in economic
theory between assumptions of allocation by price
mechanism and by fiat of the entrepreneur.
Under what conditions one or the other? Why do
firms emerge at all in a specialized economy? (if it is
a matter if information efficiency, independent
consultants and specialists could do just as well) A
firm consists of the system of relationships that
come into being when the direction of resources
is dependent on an entrepreneur. Distinguishing
mark of firm is the supersession of pure price
mechanism (i.e., pricing is not only thing that guides
the emergence of firms)
Introduction I. Summary
II. III. IV. V. Questions
The main reason why it is profitable to establish a firm
is that there is a cost of using the price mechanism
(transaction cost). a) the cost of price information, b)
the cost of making separate contracts for each
exchange transaction (Firms reduce these contracts to
one, the employee’s salary and range of duties), c) risk
attitudes, firms prefer long-term contracts, but
uncertainties involved require a vague contract, d)
external actions: sales tax on market exchange (but not
inside firm) , quotas, and rationing all would raise
transaction costs outside the firm. “The operation of a
market costs something and by forming an organization
and allowing some authority (an “entrepreneur”) to direct
the resources, certain marketing costs are saved.” (p.
392)
Introduction I. Summary
II. III. IV. V. Questions
You can also use these conceptions to
describe and predict changes in the size of
firms. Growth occurs when more (types or
volume of) transactions are organized by the
entrepreneur. Maximum size of firms
corresponds to the point at which it is no longer
cheaper to organize transactions “in house”
compared to the market. Two ways a firm can
expand: combination occurs when transaction
originally done by 2 or more entrepreneurs
become organized by one; integration occurs
when transactions between entrepreneurs on the
market become organized by one.
Introduction I. Summary
II. III. IV. V. Questions
So, all else equal, a firm will tend to be
larger if it faces a) decreased cost of organizing
and slower cost increase if transaction
organized b) decreased likelihood of
entrepreneur making mistakes c) increased
lowering of supply price factors of production.
Influenced wlliamson
The End