MODULE MANAGERIAL ECONOMICS

CHAPTER 9: FIRMS VS MARKET

Objectives:
a. Know the roles of firms and market in the economy

WHAT IS FIRM?

A firm is an organization that does business for profit. There are many forms that a firm can take, from
large corporations to a mom-and-pop business. Firms can have a single location or multiple places of
business, but all locations have to have the same employer identification number (EIN) with the IRS to
be considered the same firm.
The Origin of the Word 'Firm'
The word "firm" began to show up in English around 1744, and most scholars believe that it comes from
the German word "firma," which means "business." The German word came from the Italian word
"firma," which means "signature." The origin of all three words is the Latin verb "firmare," which meant
"to sign" or "to make firm."

We often use the word "firm" the most when referring to a business that provides a service, like a law
firm or a graphic design firm. However, it can apply to any business that provides goods and services for
profit.

Firms vs. Companies

People often think that "firm" is synonymous with the words "company," "corporation," or "business,"
and, while they are somewhat similar, the words aren't interchangeable. What's the difference between
a firm and a company? In business language, a company is just like a firm in the sense that all companies
do business for profit.

The main difference between a company and a firm is that a one-person business doesn't usually count
as a firm in business-speak. So the word "firm" refers to a business or company that has more than one
owner and operates to make a profit.
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Types of Firms

There are multiple structures that firms can operate under. A partnership is a business that has two or
more owners, and there's no limit to how many partners a company can have. Under a partnership, the
owners or partners are personally responsible for the obligations of the business, and each partner owns
a stake in the company.

A corporation is a business structure where the finances of the company are separate from the finances
of the owners. Owners of a corporation aren't personally responsible for the performance or obligations
of the firm. Corporations can borrow money, pay taxes, and enter into contracts much like individuals
can. A financial cooperative is another type of firm where the owners aren't directly liable, but investors
can give the company direction on how to operate.

Resources That Firms Use

Firms and companies rely on different types of resources to produce the goods and services that they
offer. Companies use natural resources, which are things like land, wood, water, and other materials
that come from nature. Firms often take these natural resources out of their original form and turn
them into something else.

Capital is another resource that firms use that consists of money and other financial tools that owners
and partners use to invest in the business. Human resources are how employees put their skills and
labor to work to create the goods and services that the company offers. Entrepreneurship is the hardest
resource to understand because it's made up of the ideas and thoughts that partners and owners put to
use in their firms.

The Theory of Firms

Economists have written pages and pages about the theory of firms over the decades, but when you
break the theory of firms down to its most basic meaning, it's pretty simple: firms exist to make as much
profit as they can. People go into business because they're passionate enough about a good or service
that they can provide that they want to make a living doing it.

Even as exciting as providing a good or service may be, it's still a job for the owners of a firm, and they
want to earn as much money as they can. Scholars have debated how a firm can make the most money
and how big a firm should be to make money, but their theory is pretty simple and easy to understand
without making it too complicated.

Functions of Firms

Firms and companies have multiple functions that they offer to society. The most obvious function of a
firm is to provide a good or service that people need. These can be physical items like furniture or
consumable items like food, or they can be a service like legal representation.

Another function of a firm is to provide wages for the people who work at the company, and some
companies also provide benefits like health insurance and opportunities to invest toward retirement.
Firms also contribute tax revenue to the government that helps authorities provide services to people all
over the community.
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For more knowledge please follow the link provided;

https://www.youtube.com/watch?v=VjER5cOpHLs

WHAT IS MARKET?

Market, a means by which the exchange of goods and services takes place as a result of
buyers and sellers being in contact with one another, either directly or through mediating agents
or institutions.
Markets in the most literal and immediate sense are places in which things are bought and sold.
In the modern industrial system, however, the market is not a place; it has expanded to include
the whole geographical area in which sellers compete with each other for customers. Alfred
Marshall, whose Principles of Economics (first published in 1890) was for long an authority for
English-speaking economists, based his definition of the market on that of the French
economist A. Cournot:

Economists understand by the term Market, not any particular market place in which things are
bought and sold, but the whole of any region in which buyers and sellers are in such free
intercourse with one another that the prices of the same goods tend to equality easily and
quickly.

To this Marshall added:

The more nearly perfect a market is, the stronger is the tendency for the same price to be paid
for the same thing at the same time in all parts of the market.
The concept of the market as defined above has to do primarily with more or less standardized
commodities, for example, wool or automobiles. The word market is also used in contexts such
as the market for real estate or for old masters; and there is the “labour market,” although a
contract to work for a certain wage differs from a sale of goods. There is a connecting idea in all
of these various usages—namely, the interplay of supply and demand.

Most markets consist of groups of intermediaries between the first seller of a commodity and the
final buyer. There are all kinds of intermediaries, from the brokers in the great produce
exchanges down to the village grocer. They may be mere dealers with no equipment but a
telephone, or they may provide storage and perform important services of grading, packaging,
and so on. In general, the function of a market is to collect products from scattered sources and
channel them to scattered outlets. From the point of view of the seller, dealers channel the
demand for his product; from the point of view of the buyer, they bring supplies within his reach.

There are two main types of markets for products, in which the forces of supply and demand
operate quite differently, with some overlapping and borderline cases. In the first, the producer
offers his goods and takes whatever price they will command; in the second, the producer sets
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his price and sells as much as the market will take. In addition, along with the growth of trade in
goods, there has been a proliferation of financial markets, including securities exchanges
and money markets.

For more knowledge please follow the link provided;

https://www.youtube.com/watch?v=sD_vj49o4NU

https://marketbusinessnews.com/financial-glossary/firm-definition-meaning/

https://www.britannica.com/topic/market