Firm – Complete Overview & Walkthrough
A firm is a for-profit business organization as a corporation, limited liability company (LLC), or partnership. So the firm basically provides professional services to its customers. Its mostly used with the same meaning with the company, commercial business, or any corporation.
Although Firm and Company are fundamentally similar, they contain some fundamental differences. Basically, a firm refers to a business involved in the selling of services or products for profit. In fact, a company refers to a business involved in many types of income-generating activity, including goods and services, and covers all business activities such as trades and structures.
What are Firms?
A firm is a business that involves trade activities about goods and services for profit. A company can operate in a single location. However, it can operate in different cities and even in different countries by establishing branches, stores, sales, and service offices. A company is a commercial enterprise in which units in multiple locations can be managed from a single center.
A firm is a business organization such as a corporation that produces and sells goods and services to generate revenue. The profit element is prominent in all definitions because a company must make a profit in order to exist. A name and a title represent the firm. The company name is the commercial identity of the company. Under a company name, it can contain different brands. The company may consist of different units and departments according to the primary product or service areas.
A company is called a firm mostly when it is a partnership of two or more persons. An organization is an organized group of people with a particular purpose, such as a business or government department.
For a company to grow in a free market economy, it must be competitive, and a market with freedom of competition must exist. A perfect match occurs when there are lots of sellers and buyers in the market. There is easy entry and exiting of firms, products are identical from one seller to another, and sellers are price takers.
Definition Of A Firm
The terms “Firm,” “Company,” “Business,” and “Establishment” are often used in each other to refer to any business that offers goods or services in the market.
A company is called a firm when it is a partnership of two or more persons. So the firm mostly has more than one owner (partner or shareholder), but the sole proprietorship is also possible. A firm is an organization that is an organized group of people with a particular purpose, such as a business or government department.
In microeconomics, the theory of the firm attempts to explain why firms exist, why they operate and produce as they do, and how they are structured.
Examples of Firms
If we need to give an example about the firm, the options are unlimited. Companies operate in every field whose field of activity is not prohibited by the state. So we can give examples from every sector. Examples of firms are as below:
- Manufacturing firms
- Accounting firms,
- Consulting firms,
- Entertainment firms
- Textile firms
- Law firms
Companies can be further classified according to whether they are privately owned or governmental:
- Private limited company,
- Public limited company
What Is the Difference Between a Firm and a Company?
Firm and companies are both for-profit business entities. The terms’ firm’ and ‘company’ are often used alternative each other. However, there are key differences between them. These differences can be found in different areas of the firm or company and its processes.
a) There are differences in establishing a period of a firm or company:
A partnership firm can be created by a simple agreement, whereas building a company requires several legal steps.
b) There is a difference for Regulation:
Both are also regulated under different acts. For example, in The US, regulated under the Uniform Partnership Act of 1914.
c) Membership of firms and companies:
Partnership firms have a partner limit which can be a maximum of 20 partners. So a partnership having more than 20 persons is illegal. For companies, the shareholder may have a much larger number of employees or shareholders. In the case of private companies, the maximum limit has been increased by the new Companies Act, 2013, from 50 to 200.
d) Separate Legal Entity
A Partnership Firm has no separate legal entity distinct from its partners. It’s different for companies. A Company is a separate legal entity.
In terms of day-to-day operations, management within a company comprises directors. However, within a partnership firm, each partner is expected to take equal ownership of the running of the business.
All partners of a partnership firm can have a say in the management of the business. This situation is different for companies. The management right of a company has been transferred to the Board of Directors elected by the company’s shareholders.
f) Profit for Firm and Company:
All businesses other than non-profit social businesses are established to make a profit. Profit distribution is different for the firm and the company. For example, profit is divided up among the partners that make up the firm; this is done at a documented ratio within the partnership agreement. On the other hand, profit is divided up among the company’s directors based on their shares within a company.
Firm vs. Company
Although they appear synonymous and are often used interchangeably, there is a difference between a firm and a company. A company can be any trade or business in which goods or services are sold to produce income. Further, it covers all business structures, such as a sole proprietorship, partnership, and corporation. On the other hand, a firm typically excludes the sole proprietorship business; it generally refers to a for-profit business managed by two or more partners providing professional services, such as an accounting firm.
What Is the Role of a Firm In The Industries?
Traditional Theory of the Firm is primarily concerned with firm behavior under conditions isolated from real life. In the Theory of the Firm, it is assumed that the firm operates in either “Perfect Competition” or “Imperfect Competition” markets when examining the details of production, price, and input usage. The separation of capital possession from management in modern firms leads to various problems, and a solution to those problems necessitates the incurrence of several costs.
Firms turn the wheels of the economy in three different ways. First of all, firms have the number of employees in proportion to their size. Companies pay salaries to their employees. Company employees spend the money they earn and keep the economy running.
In addition, firms need suppliers to produce or market their goods and services. Thanks to the purchases made from other companies, companies provide capital transfer among themselves. Firms pay taxes to the government in proportion to their earnings. In this way, the state serves the public interest with its tax revenue, pays the salaries of public employees, and provides jobs to companies that work on behalf of the public. After all, a firm offers benefits in many ways for the functioning and growth of the economy.
a) Factors of production
In economic theory, there’s a term called the ‘factors of production; these are inputs processed into outputs through production. For example, firms provide employment to produce goods and services. After then firms paying a salary to those individuals. These employees buy goods and services from other companies with the money they earn. It’s total “factors of production.”
b) New product development
Firms work for the highest possible profit expectation. For this, it invests in R&D studies to develop better and more efficient products. Goals such as increasing production capacity, designing higher quality products, improving people’s living standards are the motivation sources of companies. All these efforts enable the development of technology.
c) Providing end-users (consumers) with goods and services
Companies not only produce products that consumers need, but they also design products that will create needs. In short, companies strive to create demand by not being satisfied with existing demands.
Companies are not content with producing only food and standard consumer products. Firms analyze what customers need and what they may need. They try to increase the range of products by solving daily problems of consumers and simplifying life with technological progress.
Perfect competition and why it matters
Firms are said to be in perfect competition when the following conditions occur:
- Many firms produce typical products.
- Many buyers are available to buy the product, and many sellers are ready to meet the demands.
- Sellers and buyers have enough information to make decisions about the products.
- Firms can enter or leave the market without any restrictions in competitive market conditions.
Monopoly, Oligopoly, and Perfectly Competitive Market
Some variables determine the level of competition; for example, the difficulty or ease of entry into a market is understood when: The number of buyers and sellers in the market. Type of goods and services sold, conditions of competition in the market.
Market types in imperfect and perfect competition conditions:
a) Perfect Competition:
There are many buyers and sellers in a Perfect Competition Market. The majority of sellers in the market are small and medium-sized enterprises. A homogeneous product is sold in the market, and it is easy to enter and exit the market. There is no big difference between the market shares of the companies. Since there are many companies in the market and close to each other, the prices in the market cannot be determined by a few companies. If the seller raises the price independently, it will cause the buyer to turn to another seller who sells a similar product cheaper.
b) Monopolistic Competition:
Like perfectly competitive markets, there are still many small and large buyers and sellers in the market. Market entry is easy, and competition is intense. The difference in this market type compared to the perfectly competitive market is that some companies show their products differently from other products and create a certain buyer group. Although there are substitute goods in the market, consumers highly prefer a certain brand. For example, although there are hundreds of search engines, Google has dominated the market. Coca-Cola and Pepsi brands are the biggest choices of carbonated beverage consumers.
c) Oligopoly Market (Oligopoly):
In the oligopoly market, there are many buyers, but the number of sellers is limited. These firms sell similar products, and the market is under their control. There is competition between firms, often products are homogeneous, but product differentiation is made. A firm’s intervention in price requires other firms to take action in the same direction; firms cannot act independently. Even though there are price increases in the oligopoly market, consumer demands do not change much. It isn’t easy to enter the oligopoly market as a seller.
Oligopoly markets are suitable for cartel formation. Producers can change the conditions to the consumer’s detriment by making a joint decision on the amount of product to be produced and the sales price. Unlike the oligopoly market, the market with only two players is called the “Duopoly Market”.
d) Monopoly Market (Monopoly):
A type of market in which only one seller is involved. This seller may have a monopoly right, for example, as a government entity. A company may have only one source of a product sold in a country. Another possibility is that a company can produce a good or service that no one else can. That is, the state sometimes implements a monopoly market as an economic policy. But sometimes, a monopoly market results from a unique product owned by a firm. It is difficult for a new firm to enter a monopoly market. Monopoly markets are also called monopolization.
Types of Firms
A firm’s business activities are typically conducted under the firm’s name, but the degree of legal protection depends on the type of ownership structure under which the firm was created. Some organization types, such as corporations, provide more legal protection than others. There exists the concept of the mature firm that has been firmly established. Firms can assume many different types based on their ownership structures:
a) A sole proprietorship or sole trader is owned by one person, who is liable for all costs and obligations, and owns all assets. The sole proprietorship is not a common choice to establish a firm. Anyway, some entrepreneurs choose it to build a new company.
b) A partnership is a business owned by more than one interpreter. According to company type, there is no limit to the number of partners that can have a stake in ownership. A partnership’s owners are each liable for business obligations. They own everything that belongs to the business.
c) In a corporation, the businesses’ financials are separate from the owners’ financials. Company owners are not responsible for any expenses of the business, lawsuits filed against the business. A company can be owned by individuals or by a government. Companies operate in ways similar to individuals. For example, they can get loans, make contract deals, and pay taxes. A firm that more than one person owns is often called a corporation.
Main Objectives of Firms
- Profit maximization
- Sales maximization
- Increased market share/market dominance
- Social/environmental concerns
- Profit satisficing
a) Profit Maximization
Usually, in economics, we assume they are concerned with maximizing firms’ profit. High-profit means:
Higher dividends for shareholders.
More profit can be used to finance research and development.
Higher profit makes the firm less vulnerable to takeover.
Higher profit enables higher salaries for workers.
b) Sales Maximization
Firms often seek to increase their market share – even if it means less profit. This could occur for various reasons:
Increased market share increases monopoly power and may enable the firm to put up prices and make more profit in the long run.
Managers prefer to work for bigger companies as it leads to greater prestige and higher salaries.
Increasing market share may force rivals out of business. E.g., the growth of supermarkets has led to the demise of many local shops. Some firms may actually engage in predatory pricing, which involves making a loss to force a rival out of business.
c) Growth Maximization
This is similar to sales maximization and may involve mergers and takeovers. With this objective, the firm may be willing to make lower levels of profit in order to increase in size and gain more market share. More market share increases its monopoly power and ability to be a price setter.
d) Long Run Profit Maximization
In some cases, firms may sacrifice profits in the short term to increase profits in the long run. For example, the initial costs of developing a new product are high. Companies may incur losses for a period of time until some products are kept on the market. However, if they have made the right investment, they will benefit in the long run.
e) Social/Environmental Concerns
A firm may incur extra expense to choose products that don’t harm the environment or products not tested on animals. Alternatively, firms may be concerned about local community / charitable concerns.
Some firms may adopt social/environmental concerns as part of their branding. Such efforts are sometimes made specifically to impress a particular clientele. For example, companies that only produce environmentally friendly products or do not use environmentally harmful raw materials in their production processes are appreciated by nature-friendly consumers. In this way, new customers are gained, and loyalty is created in existing customers. Some firms may adopt social/environmental concerns on principle alone, even if they do little to improve sales/brand image.
Consumers don’t always make decisions on financial/economic motivations. They may consider the environmental activities.
Cooperatives may have completely different objectives to basic companies. A cooperative is run to maximize the welfare of all stakeholders – especially its employees. Any profit the cooperative makes will be shared amongst all members of the cooperative. Cooperatives are usually made up of stakeholders who try to build and develop a business together by combining their knowledge and capital. The primary purpose of the cooperative is to share costs, knowledge, work, and the resulting profit.
Family Firms – Family Business
Family Firms are those in which multiple members of the same family are involved as major owners or managers, either contemporaneously or over time.
The family business is a business governed and/or managed with the intention to shape and/or pursue the vision of the business held by a dominant coalition controlled by members of the same family or a small number of families in a manner that is potentially sustainable across generations of the family or families.
‘Firm’ in other languages:
- Une firme (French)
- Firm (Spanish, Portuguese, Italian, German, Danish, Turkish)
- фирма (Russian)
- 事務所 (Japanese)
- 间公司 (Chinese)
- شركة (Arabic)
- Fast (Swedish)
- Yritys (Finnish)
- suatu perusahaan (Indonesian)
What is an Example of a Firm?
To really understand the different types of firms that exist, we should understand that there are different types of firms just like there are different types of industry. For example:
Entrepreneurs working for themselves: A self-employed individual who owns and runs their own company.
A private company: Typically small to medium-sized (SME), these companies are usually owned by a small group of individuals and seek to maximize profits.
A public limited company, or PLC: These are usually large companies that have floated on the stock market. Members of the public may buy individual shares in these companies and thus gain from any profits made.
Cooperatives or social ventures: These companies don’t aim to maximize their profits but rather seek to achieve goals for social or economic benefit.
Companies owned by the government: Some of the largest companies are owned by the government in specific sectors. For example, state-owned postal services and utility companies.