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

The Nature of the Firm Coase, Ronald H.(1937) Economica , 4 (November): 386-405. Yuju Tu. Ronald Coase, 1991 Nobel Laureate, Economics. What is a Firm?. Question: “…What are the differences among, factory, firm, and market?”

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

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  1. The Nature of the FirmCoase, Ronald H.(1937) Economica, 4 (November): 386-405 Yuju Tu Ronald Coase, 1991 Nobel Laureate, Economics

  2. What is a Firm? • Question: “…What are the differences among, factory, firm, and market?” • Factory: Division-of-labor focus, e.g., team production yields more than the sum of individual productions • Market: Price Mechanism focus, e.g., resource allocation through price mechanism • Firm: Entrepreneur coordination focus, e.g., resource allocation by central authority

  3. Why Does a Firm Exist? • Question: “…why is there any organization”, i.e., why do firm exist? • Prior economists: Firm exists only because of price mechanism (market). For example, if price factor A becomes higher in X than in Y, A will move from Y to X until the difference disappears. • Ronald Coase: Firm exists because the cost of a central authority organizing transactions internally is cheaper than organizing them externally in the market

  4. What Determines the Firm Size? • Question: “Why is not all production carried on by one big firm?” • Ronald Coase: This is because sometimes the cost of organizing the next transaction internally will be greater than the cost of organizing that same transaction in the marketplace. • Question: “For a firm how big is big?” • Ronald Coase: Firm tends to expand until the costs of organizing transactions approach to the costs of carrying same transactions in the market (or, another firm)

  5. What Determines the Firm Size? • Question: “Why would the costs of transaction within a firm rise?” • Managerial diseconomy rise; • Larger firms may pay more for resources; • The spatial distribution of the transactions (Physical distance); • Dissimilarity of transactions; and • Rapidly changing environment

  6. Conclusions • Ronald Coase: the view of transaction-cost can help explain: • The reason for the existence of a firm • The limit of firm size • The reason why a transaction takes place in a firm, i.e., using the price mechanism (market) to allocate resources is sometimes costly

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