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 ?
Among their topics are theory of the firm and the law, organizational structures for technology firms, information and knowledge governance, change management: the organization as a micro-macro system, online resources for biologists, management in life sciences, and agile methods for engineering.
Synopsis: Now in a fully updated and revised fourth edition, "The Economics of Business Enterprise: An Introduction to Economic Organisation and the Theory of the Firm" by Martin Ricketts (Professor of Economic Organisation, University of Buckingham, UK) explores how economic activity is organized from a new institutional economics perspective.
Literature on the theory of the firm is literally flooded with a repetitive question: "Why do firms exist?" It has become such a monotonous query that while addressing it, it is increasingly difficult not to fall into either of the two traps: make trivial points, or worse, make trivial points disguised in difficult and sophisticated terminology.
The genesis and development of the core foundations of the theory of the MNE lie in economics, particularly industrial economics and the theory of the firm. Early works on international production and the MNE, especially those by Penrose (1956) and Dunning (1958), acknowledged the significance of the MNE and international production, but failed to address the issue of why international operations should take place within an organizational hierarchy rather than through the use of alternative modalities, notably exports and/or licencing.
This Article challenges that conventional wisdom by subjecting the theory of the firm to the realities of modern industrial organization.
The purpose of this study was to extend this line of research by applying Behavioral Theory of the Firm as a theory of human choice and decision-making in Arms by incorporating the practices of Czech entrepreneurial specifics.
Chapter 3 has Styhre focusing his scholarly criticism on the implications of the agency theory of the firm. Starting with the political and economic backdrop of the 1970s, Styhre explains how new theories of the firm began emerging from the academic community (libertarian and conservative economists, financial and legal scholars, and pro-competition think tanks), which purposed to replace managerial capitalism with an investor capitalism favoring the shareholders.
Despite this error, the chapter still does a good job of emphasizing the need to account for entrepreneurship in the theory of the firm, but it would greatly benefit from using Gary Miller's "managerial dilemmas" (Managerial Dilemmas [Cambridge: Cambridge University Press, 1992]) as a term of comparison instead of the theory of production functions.
(1996), "Toward a Knowledge-Based Theory of the Firm", Strategic Management Journal 17(S2): 109-122.
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.