Notes on the Theory of the Firm
THE THEORY OF THE FIRM
Notes by:Ramon Somar
THE THEORY OF THE FIRM Even though managerial economics is not concerned solely with the management of business firms, this is its principal field of application. To apply managerial economics to business management, we need a theory of the firm, a theory indicating how firms behave and what their goals are.
The concept of the firm plays a central role in the theory and practice of managerial economics. An understanding of the reason for the existence of firms, their specific role in the economy, and their objective provides a background for that theory.
Reasons for the Existence of Firms and Their Functions A firm is an organization that combines and organizes resources for the purpose of producing goods and/or services for sale.
Firm exist because it would be very inefficient and costly for entrepreneurs to enter into and enforce contracts with workers and owners of capital, land, and other resources for each separate step of the production and distribution process.
Firms often hire labor for long periods of time under agreements that specify only that a wage rate per hour or day will be paid for the workers doing what they are asked. The two parties do not have to negotiate a new contract every time the worker is given a new assignment.
The saving of the transactions costs associated with such negotiations is advantageous to both parties. Reasons for the Existence of Firms and Their Functions A second explanation for the existence of firms is that some government interference in the market-place applies to transactions among firms rather than within firms.
For example, sales taxes usually apply only to transactions between one firm and another. By internalizing some transactions within the firm that would otherwise be subject to those interferences, production costs are reduced.
Notes by:Ramon Somar
Because this is a secondary factor, firms would exist in the absence of such
Notes by:Ramon Somar
THE THEORY OF THE FIRM Even though managerial economics is not concerned solely with the management of business firms, this is its principal field of application. To apply managerial economics to business management, we need a theory of the firm, a theory indicating how firms behave and what their goals are.
The concept of the firm plays a central role in the theory and practice of managerial economics. An understanding of the reason for the existence of firms, their specific role in the economy, and their objective provides a background for that theory.
Reasons for the Existence of Firms and Their Functions A firm is an organization that combines and organizes resources for the purpose of producing goods and/or services for sale.
Firm exist because it would be very inefficient and costly for entrepreneurs to enter into and enforce contracts with workers and owners of capital, land, and other resources for each separate step of the production and distribution process.
Firms often hire labor for long periods of time under agreements that specify only that a wage rate per hour or day will be paid for the workers doing what they are asked. The two parties do not have to negotiate a new contract every time the worker is given a new assignment.
The saving of the transactions costs associated with such negotiations is advantageous to both parties. Reasons for the Existence of Firms and Their Functions A second explanation for the existence of firms is that some government interference in the market-place applies to transactions among firms rather than within firms.
For example, sales taxes usually apply only to transactions between one firm and another. By internalizing some transactions within the firm that would otherwise be subject to those interferences, production costs are reduced.
Notes by:Ramon Somar
Because this is a secondary factor, firms would exist in the absence of such