Firm In Economics

Firm In Economics

Firm, in economics not a legal entity but a unit of control and decision. As a first approach the firm can be regarded as a combination of fixed factor services. If it ceased to employ its labour and materials it could continue for a time, but if it failed to replace its plant and equipment, if its controlling management departed, it would cease to exist. in this sense it is the fixed factors which define its existence; or, in another way, the costs of the fixed factors must be covered by earnings in the long run if the firm is to continue. But there is no one long run for all factors of production: executives change, plant is modified and replaced. More recently economists have come to regard the firm as a device that supersedes the price mechanism. This idea sees the firm as the co-ordinator of activities which would otherwise be brought together by the price mechanism. In it decisions and transactions are co-ordinated by an individual (or a group). If it can make a component more cheaply than it can buy it in the market, it will incorporate the task of co-ordination within the boundaries of the firm rather than through the market.

Thus the firm appears as a unified area of planning, as a 'Wand of conscious power' within the price mechanism as a whole. In its little island it supersedes the price mechanism in co-ordinating inputs and outputs. This approach helps to explain the essential economic difference between a free or market economy, in which many small firms or planning units are co-ordinated by prices, and a planned economy, which (on paper at least) consists of one vast firm.

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