firm, theories of the

Economic analysis of units of production, usually in the private sector. There are varying theories of firms in different market structures: perfect competition, where no firm can influence the marketplace and there are no barriers to entry into the market; imperfect competition, where firms are able to influence the market price but new firms are still able to enter the market; oligopoly, where there is a small number of large firms with recognized interdependence; and monopoly, which is a single-firm industry with no possibility of other firms entering the market.

In reality, it is difficult to fit firms exactly into these market structures, but firms do behave in different ways in different market structures. The theory of perfect competition suggests that firms in competitive markets will tend to make a relatively low rate of profit and produce efficiently, whereas monopolies will produce high profits and produce less efficiently, due to the barriers to entry into the market.

There are other theories of firms which take into account other types of motivation besides profit. These include managerial and behavioural theories, but their complexity makes them less able to generate predictions about the efficiency and profitability of firms.