Theory of the Firm analyses how firms arrive at their price and output and decisions under different market structures (perfect and inperfect) given their main objective of profit maximasation.

From what we’ve said above, once can therefore come to the following conclusions;

The theory of the firm is a microeconomic concept that states that a firm exists and make decisions to maximize profits.
It influences decision-making in a variety of areas, including resource allocation, production techniques, pricing adjustments, and the volume of production.
Modern takes on the theory of the firm sometimes distinguish between long-run motivations, such as sustainability, and short-run motivations, such as profit maximisation.

Also, to better understand the theory of the firm, you will need to understand;

The theory of production
Theory of cost, revenue concepts and profit maximisation
Market structure pricing in nationalised industries.

Theory of the Firm – The meaning and objective of a firm

A firm is a production unit made that transforms resources into goods and services.

A firm is a for-profit business organization—such as a corporation, limited liability company (LLC), or partnership—that provides professional services.

Most firms have just one location. However, a business firm consists of one or more physical establishments, in which all fall under the same ownership and use the same employer identification number (EIN).

A firm can be a company or a supplier. The main objective of a firm is profit maximisation.

Apart from profit maximisation, other objectives of a firm may include the following.

Some key objectives of a firm

Job creation

Some firms simply establish in order to provide job opportunities to the public. This is mostly the case of state corporations which are created to solve the problems of unemployment in a country.

Improve development

Another key objective of some firms is to foster the development of the area where they are located. These types of firms run their businesses in such areas not solely for profit, but because they want to promote the development of the area.

Some firms may forego profit by offering low prices to customers in order for them to achieve a better standard of living. This is most common among non-profit enterprises/organisations such as State enterprises, corporations etc.

Market dormination

Firms may cut prices of their goods and services in order to gain the trust of their customers and with the aim of driving away rival firms from the market. This objective is to create a monopoly of power.

Preven the entry of new firms

In a given market area, some firms develop the strategy of limit pricing. They will turn to sell their products at lower prices in order to make it difficult for smaller firms or even firms of the same calibre to survive.

This is usually implemented when a firm feels that they are under a threat from potential competitors.

Sale Revnue maximisation

Firms may sacrifice profit by cutting down prices to increase sales, with the aim of increasing sales. And by increasing sales, it will result in an increase in production and consequentially leads to economies of scale.

Conclusion

This short lesson not was to help you get an idea of what the theory of the firm is all about and some of the objectives of every firm. We have mentioned the main objective of a firm being profit maximisation. Also, we’ve gone ahead and listed some other key objectives of a firm.

To further understand this topic, we advise you to read more on the theory of production, cost, revenue and profit, etc.

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