Economics for Lawyers (Law and Economics) Essay

Economics for Lawyers (Law and Economics) - Essay Example This is not the case in real interactions between firms. In order to dissect the concept further it would be pertinent to explore different points of views on the firm and its unique position in the market. The views of Coase, Penrose and finally Richardson will be explored in this paper in order to see how firms interact to form market structures and how these structures require the assistance of the law. 2. Defining The Firm Within the perspective of business, a firm can simply be seen as an organisation that is involved in the provision of goods and services or a combination of both to consumers1. Here it must be kept in mind that the work of such an organisation is determined by market consumption otherwise this definition would fit other organisations as well such as military organisations and the like. Therefore, the actions of a firm can be seen as being driven through competition in the market that requires the efforts of a team. Another major consideration to look into over here is the basic unit that composes the domain of economic activities. Firms are conglomerations of people who are geared to a common purpose namely the creation of economic value. In themselves, firms are actually composed of individuals and so individuals must be the basic unit of economic activity. ... This idea has been espoused by Coase who adds another dimension to hiring the services of other individuals. 2.1. Coase’s Ideas on The Nature of the Firm The earliest ideas as to why firms exist in an economy were presented by Coase2 in his article The Nature of the Firm (1937). It was recognised well before Coase’s ideas that firms existed but there had been little investigation into their need for existence. There was a visible change in emphasis of the dominant economic theory after the First World War. Analysis tended to shift from the level of industry (which relied in large part on market analysis) to the level of individual firms. This move can be attributed to a change in thinking over perfect competition. Previously perfect competition was seen as an effective model to delineate how firms behaved. Up till this point in time the emphasis of the economic theory had been to study the markets in order to understand their behaviour. There had been little work on und erstanding reasons as to why firms existed. In themselves, markets are guided Coase holds that in a perfect market, that is efficient, it would make sense to contract out services rather than hiring people. In Coase’s time the traditional theory of economics provided that entities that were best at providing goods or services were already providing these goods and services because the market was efficient. This would then have the implication that any entrepreneur looking for goods and services would tend to contract out goods and services to the best providers3. However, the actual market practice was just the opposite – entrepreneurs looked to hire people instead of contracting out services. It is only in recent years that outsourcing has