BUS 374 Chapter Article: BUS 374 Chapter : The Nature of the Firm
18 Mar 2019
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Document Summary
Modern firms can only emerge when entrepreneur begins to hire ppl. Traditional economic theory: b/c market is efficient, should always be cheaper to contract out than hire. But, lots of transaction costs to using market (cost of obtaining good/service via market more than just price of good) Eg. search & info costs, bargaining costs, keeping trade secrets, policing & enforcement costs, etc. Firms will arise when they can arrange to produce what they need internally & somehow avoid these costs. Natural limit to what can be produced internally. Increasing overhead costs & increasing propensity for overwhelmed manager to make mistakes in resource allocation. Size of firm result of finding optimal balance b/t competing tendencies of costs. Making firm larger will be initially advantageous, but decreasing returns will eventually kick in. Other things being equal, firm will be larger if. Less costs of organizing & those costs rise slower w/ increase in transactions organized.
