Coase - Price Mechanism And The Entrepreneur

8 Pages 2021 Words

e no single entity controls production, but the market itself offsets supply and demand to establish equilibrium where production and consumption are in balance. Under perfect competition, firms operate as ‘price-takers’, operating in a perfectly elastic market, whereby they have no independent influence by which to influence their own revenues. Should firms X and Z sell identical products, any rise in price by firm X will immediately diminish their own supply, as customers move to firm Z.
An understanding of the basic principals of prefect competition allow quite easily for the assimilation of the price mechanism. Much in the same way as consumers will switch sellers, the allocation of factors in the market will switch to where the costs are lowest, until such time as the relative cost difference disappears.

Of course, to speculate as to all economic activity being the result of the price mechanism, through market transactions, is highly misleading. Due to imperfections in the structure of market transactions, which allow for limited efficiency of costs, managerial control emerged. The theory of the entrepreneur as a source of direction of factors in due to the potential for further cost efficiency than that of the independent market.
Coase analysed the conditions under which it makes sense for an entrepreneur to seek hired help rather than contracting out (i.e. operation within a controlled firm as opposed to operating on the market). He noted, that though the market was viewed as ‘efficient’ (i.e. those who are best at providing each good or service are already doing so), the cost of obtaining a good on the market, was actually more that the price of the good. This is where the firm acquires its stance, through the aim to operate outside the realm of these “transaction costs”.


Transaction Costs: The Downfall of the Price Mechanism?

Firms will arise when they can arrange to produce what they need internally an...