What kind of firms are there?

Firms organize in one of three general ways:

1) Sole proprietorship - directly owner-operated

2) Partnership - joining of two or more individuals

3) Corporation - "owned" by investors, run by managers

These forms also differ in terms of their liability to potential creditors

• most partnerships have unlimited liability
  
• corporations have limited liability

Why do firms exist?

1. Transactions costs occur as goods and services are provided

Definition: cost of "doing business" (costs other than production and distribution costs)

2. Firms minimize costs

Cost minimization => Profit maximization

Example of various types of transaction costs:

Suppose Ford wants to design and sell a new automobile.
There are various stages that Ford follows, in order to produce a commercially viable product.

• Design stage
  
• Testing stage
  
• Prototype stage
  
• Marketing stage
  
• Commercialization stage

What problems may arise?

1. Organizing the project: internal product development or external?

internal commitment of specialized resources => switching costs

2. Securing/appropriating a return on the investment into the project

safeguarding against opportunistic behavior => monitoring costs

3. Adapting to future problems - developing contingencies

"bounded rationality" and costly information => information costs