theory of the firm


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theory of the firm

the body of theory concerned with how individual firms combine quantities of FACTOR INPUTS to produce OUTPUTS of goods and services and their pricing and output decisions. A basic assumption of the theory is that the objective of the firm is PROFIT MAXIMIZATION. The theory provides an explanation of why SUPPLY CURVES slope upwards.

The theory of the firm in traditional economics is a ‘building block’ in understanding resource allocation processes at the level of the market. To facilitate market analysis, certain simplifying assumptions are made about firms: that all firms are ‘the same ‘, operating with identical cost structures, demand conditions and each having the objective of profit maximization. This portrayal of the firm is an integral element in each of the market structures examined by the THEORY OF MARKETS (see, especially, PERFECT COMPETITION, MONOPOLISTIC COMPETITION).

Although the conventional theory of the firm has been extended to allow for differences in costs between firms (see PRICE LEADERSHIP, X-INEFFICIENCY) and differences in objectives (see SALES-REVENUE MAXIMIZATION, ASSET-GROWTH MAXIMIZATION), its fundamental focus on the market has remained unchanged.

A more radical reformulation of the theory of the firm, the RESOURCE-BASED THEORY OF THE FIRM, shifts the focus of the analysis away from the market to the firm itself, emphasizing the differences between firms in terms of their internal resources and capabilities as a means of establishing COMPETITIVE ADVANTAGES over rival suppliers. See MARGINAL-PHYSICAL PRODUCT, MARGINAL-REVENUE PRODUCT, COST FUNCTION, MARGINAL COST, MARGINAL REVENUE, FIRM OBJECTIVES, THEORY OF MARKETS, MANAGERIAL THEORIES OF THE FIRM, BEHAVIOURAL THEORY OF THE FIRM, PRINCIPAL-AGENT THEORY.

References in periodicals archive ?
In this analysis, I argue that the behavioral theory of the firm and its descendent theories (Cyert and March 1963; Greve 2003a) are particularly well suited for explaining when decision makers respond to problems such as poor performance that could result from misalignment with firm-specific optimal levels of multinationality.
Outra observacao importante descrita por Argote & Greve (2007) refere-se aos testes qualitativos de proposicoes (teorizacao e simulacoes) extraidas dos estudos de caso de A Behavioral Theory of The Firm, considerando a parte mais fraco do trabalho empirico.
The second chapter provides a good overview of the Austrian theory of the firm as developed by authors such as Nicolai Foss, Peter Klein, Richard Langlois, and Frederic Sautet.
The fifteen pieces that make up the main body of the text have been organized in three parts devoted to strategy and the theory of the firm or company, innovation and knowledge in a variety of business contexts, and entrepreneurial thinking and its various applications.
The book, based on a number of previously published and unpublished papers and essays, weaves together explorations in fields ranging from the theory of the firm, through international political economy and monetary economics, to the theory of consumer choice.
The behavioral theory of the firm proposes that all managers pursue both economic and noneconomic goals.
Topics of the 12 papers include the interplay between hierarchical control and intrinsic motivation, the role of trust in the negotiation process, the uncertain nature of innovation, the distinction between intra-cultural trust and inter-cultural trust, and the economic theory of the firm.
This Article uses the theory of the firm literature to provide a new doctrinal definition for "employee" based on the concept of participation rather than control.
Coase's (1937) transaction cost theory of the firm was one of the first neo -classical attempts to define the firm theoretically in relation to the market.
In recent years, Alfred Marshall's reflections on industrial organization have attracted renewed attention, first in the booming literature on the industrial district and then as anticipations of the competence theory of the firm.
Lewin especially stresses the role and function of the business firm, and uses the inherent ignorance in a market with changing capital structures to draft a capital-based theory of the firm and human resources.
As an emerging branch of the resource based view, knowledge based view enhances the theory of the firm by addressing areas such as nature of coordination, organization structure, role of management, and the allocation of decision making (Grant, 1996).