What is meant by transaction costs and what part do they play in our Essay

What is meant by transaction costs and what part do they play in our understanding of the reasons for the existence of firms - Essay Example Coase’s theory that the transaction costs form the economic groundwork for all firms, thus becoming the sole reason for the existence of any organisation within marketplace, however has met with a number of contradictions. Many economists contend that existence of firms is not solely dependent on transaction costs. Other abilities (like being able to handle large variety of resources)   are of great advantage to any firm, especially in the context of new technologies, which create various opportunities where the organisation can improve their production values and increase their revenues, where the earned benefits accumulate to ‘start-ups,’ capable of creating more contemporary firms (  Alchian, and Demsetz, 1972, 777-795). Thus here the basic question is: does Coase’s theory on transaction costs present a holistic view on explaining why firms exist? In  economics,  transaction cost  refers to the expenditure  incurred while making a financial exchange, which can be stated as the cost incurred when one wishes to participate in a market. Humans by nature are social animals and tend to group together to conduct their various daily affairs, conducting business being one of them. Bartering is also another basic human nature, and this is most evident in marketplaces, where individuals tend to seek the best bargain by competing with their opponents (Maynard, 1982). Markets are organised social spaces for conducting such businesses or exchange of items and have been in vogue from the ancient times. Right from its origin there has been two forms of market: external market, where trade took place between communities, located at long distances from each other; and internal market, which is located within a particular society or community (Swedberg, 2005, 234-235). The producers gather here for gaining more customers;