Principles of Microeconomics

By Peter Else; Peter Curwen | Go to book overview

CHAPTER EIGHT

FROM INDIVIDUALS TO FIRMS

Introducing the firm

Having looked in some detail at the behaviour of the individual, we turn now to the analysis of a second important economic agent - the firm. A firm, like the proverbial elephant, is difficult to define but is nevertheless a reasonably recognizable entity, and the indications are that there are currently of the order of half a million firms of one sort or another operating in the United Kingdom concerned with the production and trading of a great variety of goods and services. They range from small one-man businesses to giant multinational undertakings whose annual turnover is comparable to the gross national product of some European countries. Amongst them can be found immense diversity not only in size and in what they produce, but in the way they are organized, how they are financed, the conditions under which they operate, and so forth. Despite all this diversity, they share, like elephants, certain common features.

Perhaps the most common feature of firms is that they are all involved in production of one form or another, that is, in transforming inputs into an output of goods and services. Indeed, the firm has been defined as ‘the fundamental unit of organisation of production in a market economy’ (Greenwood, 1982). Whilst this may be the case, it will be recalled that households can also be viewed as being involved in production. In recognition of this it might be argued that, whereas household production is largely geared to generating utility for members of a household, production in firms is carried out with a view to the potential financial gains attainable by selling their products on the market. Again, although this may also be true, it still doesn’t provide an entirely satisfactory distinction between the two because many households also produce labour services for the market (requiring inputs of food, rest and relaxation, etc.) if nothing else.

However, the fact that it is difficult to draw a line between households and firms is not important for our purposes. In general terms, economic agents produce for the market rather than for their own direct use in order to exploit whatever comparative advantages they may have, and to benefit from the

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