Question

what is the meaning of economist theory of the firm? please explain it to me well. thanks

Answer 1

In neoclassical economic approach to economics focusing on the determination of goods, outputs, and income distributions in markets through supply and demand the theory of firm is a microeconomic concept that states that firm exists and make decisions to maximize profits.

A firm maximizes profits by creating a gap between revenue and costs. neoclassical economics, the theory of the firm is a microeconomic concept that states that a firm exists and make decisions to maximize profits.

The of theory the firm influences decision-making in a variety of areas, including resource allocation, production techniques, pricing adjustments, and the volume of production.

• Modern takes on the theory of the firm sometimes distinguish between long-run motivations, such as sustainability, and short-run motivations, such as profit maximization.

Understanding the Theory of the Firm

Neoclassical economics dominates mainstream economics today, so the theory of the firm (and other theories associated with neoclassicism) influences decision-making in a variety of areas, including resource allocation, production techniques, pricing adjustments, and the volume of production.

While early economic analysis focused on broad industries, as the 19th century progressed, more economists began to ask basic questions about why companies produce what they produce and what motivates their choices when allocating capital and labor.

However, the theory has been debated and expanded to consider whether a company's goal is to maximize profits in the short-term or long-term. Modern takes on the theory of the firm sometimes distinguish between long-run motivations, such as sustainability, and short-run motivations, such as profit maximization.

If a company's goal is to maximize short-term profits, it might find ways to boost revenue and reduce costs. However, companies that utilize fixed assets, like equipment, would ultimately need to make capital investments to ensure the company is profitable in the long-term. The use of cash to invest in assets would undoubtedly hurt short-term profits but would help with the long-term viability of the company.

Competition (not just profit) can also impact the decision making of company executives. If competition is strong, the company will need to not only maximize profits but also stay one step ahead of its competitors by reinventing itself and adapting its offerings. Therefore, long-term profits could only be maximized if there's a balance between short-term profits and investing in the future.