The purpose of this book is to present a general theory of the firm. The theory provides a microeconomic framework in which entrepreneurs, firms, markets, and organizations are endogenous. The models help to explain why firms exist, how firms are established, and what firms contribute to the economy. Because firms create and operate markets, The Theory of the Firm helps to explain how markets arise and how they work, and provides a basic analysis of the formation and design of organizations.

The structure of the theory of the firm is as follows. Consumers and their preferences, endowments, and intellectual property, are exogenous to the model. Consumers choose to become entrepreneurs by working to establish firms, which makes entrepreneurs endogenous. Through the actions of entrepreneurs, firms are established endogenously. Firms act as market makers by creating and operating markets, so that markets also are endogenous. Firms also create and manage organizations that transact internally and in the marketplace, making organizations endogenous. Economic equilibria are the result of consumer-entrepreneurs who establish firms and, in turn, of firms that create and manage markets and organizations. Firms, markets, and transactions are the results of economic equilibria. This framework is summarized in Figure I.1.

Economics is a social science. Economic relationships between individuals in society are its essential elements. Accordingly, the theory of the firm rests upon the characteristics and actions of individual consumers and their relationships. Acting together they form families, communities, social institutions, and governments.