Essay: The concept of a firm

The concept of firm consists of a number of economic theories that describe the nature of the firm, company, or corporation, including its existence, behaviour, structure, and relationship to the market.
A firm is a collection of resources that is transformed into products demanded by consumers.A firm is an organization which buys factors of production and puts them to use producing goods or services.
1.3.1 Types
Let us discuss about the types of firm
Three types of firms are as follows:
1.Sole Proprietorship
2.Partnership
3.Corporation
Sole Proprietorship
It has one owner. There is no formal process to establish a sole proprietorship. It has unlimited liability i.e All the assets of the owner, including a home or personal stereo set can be claimed to pay off debts incurred in operating the firm.
In this type ,profits are taxed as the personal income of the owner.
Partnership
It has more than one owner. It can be established informally. In this type wise partners enter into a legal agreement.There is an unlimited liability for each owner. Profits are taxed as the personal income of the owner.
Corporation
The firm is considered a legal person that can be sued in court and taxed. Here one or more owners are called stock or share holders.It must be established through a legal process. The profits of the corporation may be paid out in dividends or may be reinvested in the firm as retained earnings.
Limited liability: The most the owners can lose is the funds they invested in purchasing the shares of the firm.
Profits are taxed first as the income of the corporation. When they are paid out as dividends on the shares of the company they are taxed again as the personal income of the owners.
1.3.2 Objectives and goals
Let us see the Objectives and Goals of Business Firms
The different objectives of the business firm in the modern set up.
Profit Maximization
Generally, profits are the primary measure of the success of any business. It is the acid test of the economic strength of the firm.
Economic theory makes fundamental assumption that maximize profit is the basic objective of every firm. This may be due to number of measures as follows:
(1)Achieving leadership: Firms’ often like to become leaders in the respective line of business. They would rather try to attain industrial leadership at the cost of profits.
In those cases, the objective of profit-maximization is subordinated to the leadership-goal in the field. Leadership may connote either maximum sales or manufacture of maximum product lines.
(2)For avoiding potential competition: Firms may restrict the profit in order to discourage other firms from entering the field and competing with them.
If the firm is maximizing profit, it will be an alluring proposition for the new firms to enter the field of production.
The new entrants may snatch away the market, make infringement on patent rights of the existing firm and may also encroach on the firm’s resources of raw materials.
In order to avoid such potential competition, the firms may adopt a policy of profit restriction, instead of profit-maximization. This is more so in the case of firms enjoying weak or slender monopoly.
(3)For preventing Government’s intervention: Higher profit’s in business is considered as an index of monopoly power. The government’s attitude towards profit and the firm’s attitude towards profit will be different.
Maximum profit may create an impression that the firm is exploiting the consumers and this may result in the public demand for nationalizing the firm or firms.
The government may also probe into the financial structure of the firm, make regulation of prices, profits and dividends.
Just to woo the public and to restrain the zeal of nationalization, the firms may adopt a policy of restricted profit.
(4)For maintaining customer’s goodwill: In modern business, customers goodwill is valued more than anything else. In order to maintain that, the firms may adopt the policy of restricted profit and low price for the commodity.
Even in times of increased taxes and excise duties, these firms may not increase the price but reduce the profit margin and thereby win the approbation of the customers.
(5)For restraining wage demands: Higher profit is an indication of ability to pay higher wages by the firms. Organized Trade Unions advance their arguments on the basis of higher profits earned by the firm for increasing the wages of labourers, bonus benefit etc. But in India this point has no validity as wages of labourers are fixed by Wage Boards and payment of minimum bonus is a statutory obligation. Hence, the firms may have no elbow-room for making decisions in this matter.
(6)For achieving financial soundness and liquidity: Some firms may give greater importance to financial soundness and liquidity, rather than profit-maximization. Considerations of maximum profit may result in huge investment in fixed assets and consequently the liquidity of the firm will be reduced.
(7)For avoiding risks: Decisions regarding profit maximization may involve risks. Many new projects have to be worked through uncertainties. Generally, business managers will avoid taking those risks which may result even in losing their jobs or losing the image of the firm. Further, the rewards for business managers may not be directly proportional to the profits earned.
Firms may not aim at profit maximization, they may try their best to achieve sufficient profit to cover the risk of economic activity. The first duty of the business is to survive by avoiding losses. The guiding principle of business economics is not profit-maximization, but avoiding loss.
Welfare Goals
Business forms may promote some welfare goals. They forces on welfare of employees and society.
Employees
The firms may focus an welfare of its employees. The resources of the form may be channeled for welfare activities like housing facilities to workers, medical facilities and better living conditions through better wages, leisure and cultural activities, co-operative organizations etc.
Society
This has came into lime light of late and the firms have realized the social responsibility. It provides facilities to society from which it has drawn its resources. Building of hospitals, charitable institution, passes, libraries, roads etc. are examples of this. By adopting there welfare measures ,the firms attempt to bring about a social change.