Last Updated 28 Jan 2021

Why Firms Exist

Category Microeconomics
Essay type Research
Words 813 (3 pages)
Views 406

It has been agreed that firms are the most basic units of the economy. They have for long been viewed as the basic units of production. Firms have been the driving force in growing and grown economies. Since the production process is the process that gives rise to goods, the firms that deal with these processes are important. If any person therefore wishes to study the economy at a given country, they would have to organize the firms that exist and the business they are involved in. They have to know the goods provided by the firm or the service the firm provides to enable them know the capacity of the economy.

Several theories have been developed over time to explain the position of a firm in an economy. Most microeconomics books view the firm as the basic unit of production. This view holds the firm as a production function involving profit maximization subject to resource and technological constraints. The firm is viewed as a single irreducible entity with no separation of ownership and control other than profits fort managers in large corporations. Other opposing theories view the firm as a means to add market value by managers (Sarasvathy, ).

A firm can be defined as an economic institution that transforms factors of production into goods and services. The firm organizes the factors of production which are land, labor and capital. The firm is established at some location, invests by building premises and then hires people to be involved in the production process. Through these factors of production the firm is able to produce goods and services. These are later sold to various kinds of customers who may include the government or other businesses. Some firms are involved in the production of goods that count as raw materials to other firms (Gorvey, 2004)

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The economists have raised several questions in their study of firms. The main question is why do firms exist? Other questions economists have been discussing over time are the factors that determine the boundaries of firms and the markets. The factors that determine the internal organization of the firm have also been debated (Rathe &Witt, undated). The processes that lead to the establishment of a firm also need have been evaluated. A greater understanding of the answers to all the above questions informs the economists the much contribution that firms make in an economy.

To begin, with we shall evaluate a few reasons why firms are established. As earlier stated, firms are involved in the production of goods and services. These goods are bought by end consumers or intermediate consumers. An economy without firms is weak since no goods would be released into the market. Other firms deal with the provision of services. Firms are a source of revenue to the government. The revenue earned in terms of taxes imposed on the goods or services by firms. Through the revenues, the government is able to meet its expenses like paying its workers and building infrastructure.

Governments may also get involved in huge projects that run over several decades based on these revenues. Firms are also a source of income for the workers. This enables the country to empower its citizens to engage in purchase of goods and services. People incur costs by virtue of staying in a house, buying food, clothing and other necessary staff. Transport is also part of human life today. To enable people to have these basic needs, firms are established as source of income. The size of a firm determines the amount of contribution it can make to the economy. The big firms could be traced to the time they were small.

The management of the firms differs with size. Several factors will determine the size of a firm the main factor being availability of capital. Governments are able to set up big firms because of big capital. There are numerous factors that determine how much goods a firm should produce. These are the otherwise called market forces. Markets may be defined as arrangements that allow buyers and sellers to meet and exchange goods and services voluntarily. Markets differ with firms in that firms deal with the production of goods while markets deal with the exchange of such goods.

It is in the market that prices for a firm’s products will be determined. In determination of the price of a commodity, the firm always intends to fix a price that will enable it to cover production costs and leave room to make profits. The price should also be such that consumers will find it easy to buy the commodity or service. At the market, the final price of the commodity will be determined. This is because there are other firms that deal with the similar products and ultimately all prices will have to settle down to a level agreeable to both the buyer and seller. There are some economic laws that affect firms operations.

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Why Firms Exist. (2018, Oct 13). Retrieved from

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