1. Presented by Danielle Jones
The Nature of the Firm Author: Ronald H. Coase Economica Vol. 4 (November 1937) pp
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 servant’s 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