【937 THE NATURE OF THE FIRM 395 is greatest,that is,fails to make the best use of the factors of production.Again,a point must be reached where the loss through the waste of resources is equal to the marketing costs of the exchange transaction in the open market or to the loss if the transaction was organised by another entrepreneur.Finally,the supply price of one or more of the factors of production may rise,because the "other advantages"of a small firm are greater than those of a large firm.1 Of course,the actual point where the expansion of the firm ceases might be determined by a combination of the factors mentioned above.The first two reasons given most probably correspond to the economists'phrase of"diminishing returns to management." The point has been made in the previous paragraph that a firm will tend to expand until the costs of organising an extra transaction within the firm become equal to the costs of carrying out the same transaction by means of an exchange on the open market or the costs of organising in another firm.But if the firm stops its expansion at a point below the costs of marketing in the open market and at a point equal to the costs of organising in another firm,in most cases (excluding the case of combination"),this will imply that there is a market transaction between these two producers,each of whom could organise it at less than the actual marketing costs.How is the paradox to be resolved If we consider an example the reason for this will become clear.Suppose is buying a product from B and that both and B could organise this marketing transaction at less than its present cost.B,we can assume, is not organising one process or stage of production,but several.If therefore wishes to avoid a market transaction, he will have to take over all the processes of production controlled by B.Unless takes over all the processes of 1 Far a diteussion of the variation af the supply pticeof factors of produetio to firms ai varying sire,see E.A.G.Rohinson,Ths Saructure of Competitae fudustry.It is some times said that the supply price of organising ability inereases as the size of the firm increases because men ptefer to be the heads of small independent busineses rather thao the heads of departments in a large business.See Jones,The Trust Probiest,p.531,and Macgregor, Indastrial Cominsrion,p.63 This is commn argument of choee who advocate Rational- isation.Itsid thaargesunits would be more efci but owing to the individualistic spirit of the smaller entrepreneure,they prefer to remain independent,apparently in spite of the bigher income which their increased eficiency under Rationalisation makes posible. This diseussian is,af course,brief and incomplete.For a more thorough discussion of this particular problem,see N.Kaldor,"The Equilibriur of the Firm,"Ecomi Fo March.and B.A.G.Rabinsoo, "The Prablem of Management and the Sise of the Firm, Eeanoute Fourital,Tune,1914. A definition of this term is given below