  Most of us know that the economy exists because of the competing forces of supply and demand. But seldom have we questioned as to why it would be necessary to have organizations/firms in order to do the production? Outside of the firm, price movements direct production, which is coordinated through a series of transactions in the market. However, inside the firm, these transactions are eliminated and are instead replaced by an enterpreneur-coordinator who directs production. R.H.Coase was the first to ask such a question, and his theories became the foundation of what is called Coasian Economics. He asked: "If production is regulated by price movements, production could be carried on without any organization at all, in which case, why is there any organization at all?
" The main reason why it would be profitable to establish a firm would be that there is a cost of using the price mechanism. Every transaction in the economy must be performed at a cost. It would be far more favourable if the transaction costs that are incurred in this manner be minimized. There could be two approaches to doing that. One, employ the services of specialists who would enter into a contract with the producer, thereby replacing multiple transactions by one, and the second, to employ certain factors who would agree to agree to obey the instructions of the enterpreneur within certain limits for a certain renumeration.
Such a contract should only state the limits of the powers of the enterpreneur; within these limits, he can therefore direct the other factors of production. Also, owing to the dificulty of forecasting, the longer the period of a contract for the supply of a commodity or service, the less possible and indeed desirable it is for a the purchaser to specify what the contractor can and should do. A firm is likely to emerge in those cases where a very short term contract is likely to be satisfactory.
To sum it up, the operation of a market costs something and by forming an organization and allowing some authority (an "enterpreneur") to direct the resources, such costs can be saved. The enterpreneur has to carry our his function at less cost, taking into account the fact that he may get the factors of production at a lower price than the market cost he is trying to overcome.
If not, he can always revert back to the open market if he fails to do this. The interesting thing is that without the uncertainty factor, a firm would probably not arise. An enterpreneur may also be defined as a person who takes the residual and fluctuating income from production while the employees engaged in production take a fixed income. However this may not seem to be the reason for the formation of a firm, as the profits may be shared by the employees. 
