Economic Analysis

Module 3. Theory of production

Lesson 12
CONCEPT OF FIRM AND INDUSTRY

12.1 Introduction

In economics, a firm holds important position as at the firm level managerial decisions are taken. In common language a firm is considered as a manufacturing unit involved in production of goods. The scope of the term firm in economics is broad. It represents any business organization inhering service & agriculture organization also.

12.2 Definition of Firm

Some definitions of firm given by renowned economists are given below.

1. Firm is a unit of production that employs factors of production (or inputs) to produce goods & services under given state of technology.

2. It is an independently administered business unit – Hanson.

3. It is a center of control where the decisions about what to produce & how to produce are taken.

4. It is a business unit which hires productive resources for the purpose of producing goods & services.

5. A firm is an independent organization whose destiny is determined by the magnitude of the aggregate pay off & in which the aggregate pay off production & sale of goods or services ( Harvey Leibenstein).

All these definitions have evolved during different time periods. They try to emphasis the different economic problems faced by firms. From various definitions different characteristic features of firm emerge which are listed below.

1. It is a place where all decision making related to production are taken viz what, where & how much to produce.

2. It is a place where manpower is hired for production.

3. It is a place where all the resources of production are brought together, production is done as well as sale & distribution of the manufactured product is carried out.

4. The state of technology is defined by the firms production function.

A firm is required to carry out all diverse functions related to production & marketing at the same time. While earning profit, firm as a production unit tries to manufacture the goods or provide service as per the consumer demand. The main objective of any firm is to maximize profit. Traditionally it was assumed that firm tries to maximize profit in each time period. But now it is realized that firm’s objective should be to maximize profit in long run irrespective of profit or loss in short run.

12.3 Industry

Industry is a group of related firms. The relationship between the firms may be either based upon product or process criterion, e.g. dairy industry or food processing industry etc. The concept of industry is helpful to government and businessmen to formulate their policies.

12.3.1 Types of industry

The activities which are undertaken to produce, convert, extract and fabricate raw materials into finished goods are termed as industries. It is the process where goods are made usable and consumable. There are four different types of industries. These are:

a) Genetic Industry: It involves activities in reproducing and multiplying certain species of plants and animals for the sake of earning profit from their sale. Fish culture, cattle breeding, goatery and piggery are included in genetic industries.

b) Extractive Industry: The industries engaged with the discovery or extracting natural resources like minerals soil, water and forests are called extractive industries. Mining, agriculture and fishing are best examples of extractive industries.

c) Manufacturing Industries: The industries engaged in the conversion of raw material into finished products are called manufacturing industries. Cotton textile, sugar, iron and steel are the best examples of manufacturing industries.

d) Construction Industry: The industries in the construction of infrastructure like building, dams, roads, bridges and canals are called construction industries