Pierre Omidyar set up a Web site to help his fiancée Pamela collect and trade Pez candy dispensers, which were colorful toys molded in the form of cartoon characters. He launched an auction Web site as a sole proprietorship and it soon sparked the interest of many different types of collectors and hobbyists. The company incorporated as demand flourished and it expanded its scope. Omidyar renamed the company eBay, and a year later Omidyar relinquished his position as CEO when the company went public. The company diversified its market-making activities as it grew to become “the world's online marketplace.” Pierre Omidyar's founding of eBay illustrates the role of entrepreneurs in establishing firms.

Entrepreneurs play a central role in the economy because they are the prime movers – the makers of firms. A consumer becomes an entrepreneur by deciding to establish a firm, so entrepreneurs are endogenous to the economy. The question – Why do firms exist? – is closely connected to another question – Why do consumers choose to become entrepreneurs? Answering this question provides fundamental insights into the theory of the firm. By examining the decisions of the entrepreneur, this chapter provides an analysis of the economic role of the entrepreneur.

The general theory of the firm places the entrepreneur at the center of microeconomic analysis. The entrepreneur engages in transactions that are needed to establish firms. In turn, firms create and operate markets and organizations.