THEORY OF THE FIRM

Business studies study module
  • A firm; This is a single unit of business organization that brings together the factors of production to produce any given commodity.

A firm may also be defined as a business enterprise under one management and control.

Example; Mumias sugar factory, Bata Shoe Company e.t.c

-Firms may be sole proprietorship, partnerships or companies. They may therefore be small e.g. an artisan or mechanic working in her/his garage or large like a multinational limited company producing many different products e.g. coca-cola company.

-A firm even though under one management and control may have several branches/plants.

  • An industry; This refers to all those firms producing the same product for a specific market/a group of related firms that compete with one another i.e.
  1. Firms that produce the same product e.g. the firms operating as sugar manufactures as Mumias Sugar Company, Sony Sugar Company and Miwani Sugar Company.
  2. Firms that extract the same raw materials e.g. the salt mining firms, Magadi Soda Company and other firms which mine salt at the North coast Region near Malindi.
  3. Firms that provide similar services e.g. the transport industry such as Akamba Bus service, coast Bus Company and Easy Coach Company.

NOTE: In the definition of the firm, we assume that a firm in a unit that makes decision with respect to the production and sale of goods and services in the regard, we assume that

All firms are profit-maximisers i.e. they seek to make as much profit as possible.

Each firm can be regarded as a single consistent decision making unit.

The life of all business enterprises/firms are therefore characterized several decision-making processes which are all aimed at facilitating realization of the objectives(profit maximization) such decisions may include; what to produce and how much, where and when to produce, how much to invest and how much to price goods/services e.t.c



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