Understanding Firms: A Business Economics Perspective

What is a Firm?

Let us now try to understand the meaning of a 'firm'. A firm is a focal point of the production system of any country. A firm produces goods with the help of its own resources. Sometimes these resources are borrowed from outside, and they are paid remuneration (price) for using them, for example, land, labor, capital, etc. A firm is an organizational unit, while a plant is a 'technical unit'. The objective of a firm in organizing such factors of production is to maximize profit. In other words, profit is the main objective of a firm. Any decision of a firm is taken in accordance with this objective.

Two Views of a Firm in Business Economics

In business economics, a firm is considered in two ways:

1. From the theoretical point of view.
2. From the practical point of view.

Theoretical View of a Firm

From a theoretical point of view, a firm is a fundamental component of production. It means all the important decisions regarding the production of goods are basically taken by the firms. The decisions like what to produce, how much to produce, where to produce, what resources are to be used, how to coordinate them, what technique is to be used, where to sell the product, and what price is to be determined are taken by a firm. Theoretically speaking, a firm is a unit that integrates the factors of production. The basic incentive of a firm is to make a profit.

Practical View of a Firm

From a practical point of view, the firm is a wider concept because, in practice, although a firm integrates factors of production to earn a profit, it also carries the management and entrepreneurial functions. The bigger a firm, the bigger and more complex are these functions.

Secondly, as mentioned earlier, a firm may have many plants, either in one or different countries and regions. The ownership of plants, its management, and control is vested in the firm. For example, 'Telco,' a private firm, has its plants at Pune, Jamshedpur, and Lukhnow. The ownership of these plants is in the hands of Telco. These plants are controlled and managed by Telco. Oil India Ltd., a public undertaking, too has its plants at places like Barouni, Vishakhapattanam, Koyali, Kochin, etc., in India. Coca-Cola has its plants throughout the world.

Conclusion

In short, a firm is the main component of the production system, and a firm carries out functions like decision-making, control, management, etc.