Theory of the firm

As you know, the company is engaged in the search for the best state in which it can maximize its profits. This mechanism clarifies the study of competition in market conditions. But what else can you say about the firm, except that it maximizes your income? The theory of the firm is viewed in the economy from two sides.

Based on the views of neoclassicists on the processes in microeconomics, a technological approach has emerged. He analyzes the behavior of the firm and is also called functional. This approach assumes that for any combination of factors of production, it is possible to determine the function that expresses the greatest volume of output at a certain level of technological development. This is the so-called production function. With its help, you can determine what proportion between resources leads to the largest amount of production, taking into account the relationship between costs and outputs.

The theory of a firm in the framework of a technological approach is considered primarily from the point of view of its boundaries. This problem is central. The scale of production directly affects the economy of returns or its increase. In accordance with this pattern, the best size of a firm is one that does not lead to a sharp increase in variable costs.

Another, alternative, view of the behavior of the firm is the institutional theory of the firm. This approach places in the chapter of study not the conditions for improving profit, but the very phenomenon of the appearance of a company, its development and disappearance. This theory of the firm, to explain the structure of the organization and content, uses not only the category of the institution, but also such concepts as asymmetric information, opportunistic behavior, transaction costs, contract and specificity of resources.

The firm as an economic phenomenon has good reasons for occurrence. When one entity wishes to enter into relations with another entity in matters relating to the processes of exchange, it must provide for the protection of its own interests. This can be done by concluding appropriate contracts or contracts.

The conclusion of any transaction relating to the exchange is made after negotiations, during which the order of transfer of something, its price and other moments is specified. The hierarchical construction inside the company helps to reduce the amount of transaction costs associated with negotiations. That is, when the majority of employees work within the framework of one organization, there is no need to contract with each one individually. The legal relationship between employers and their employees is regulated by a uniform labor law.

The neoinstitutional theory of the firm explores the "principal-agent" problem, in which the principal is the owner of some resource, and the agent is that entity that is given the rights of the owner to use this kind of resources. That is, the principal delegates some powers to the agent, and he undertakes to represent the interests of the principal for a fee. Examples of such relationships are: landowners and tenants, legislative bodies and voters, owners of firms and their managers. This theory of the firm is directly related to asymmetric information and opportunistic behavior. This means that information between participants is not distributed identically: as a rule, the agent knows more than the principal, so that the latter can not absolutely control the actions of the first. Opportunistic behavior occurs when the functions of the manager of a firm are significantly different from the functions of its owner.

From all that was discussed above, the following definition follows: a firm is such an activity structure that is aimed at a constant search for the most profitable way that products can be produced even under conditions of partial certainty.