What is Firm: Objectives of a Firm

Meaning of Firm

According to Professor S.E. Landsbury___” Firm is an organization that produces and sell goods with the goal of maximizing its profits”.

According to Professor R.L. Miller___” Firm is an organization that buys and hires resources and sell goods and services”.

The Firms are classified on the basis of investment limit, number of owners and government participation in business.

Thus, the classification of firms is as follows:

  1. Small, medium and large,
  2. Proprietorship, partnership and corporations and,
  3. Public sector, private sector and joint sector.

Business and non-business are the two categories of firm. Profit is the sole objective of the business firm whereas non-business firms like universities, hospitals, libraries and museums operate as ‘not-for-profit’ organizations.

Objectives of a Firm

The main objective of the entrepreneur is to organize and coordinate various factors of production, supervise and manage them for producing goods and services for the firm in order to fulfill the objective of the firm.

  1. Profit Maximization.
  2. Sales Maximization.
  3. Value and Wealth Maximization.
  4. Satisfactory Level of Profits.
  5. Managerial Utility Maximization.

Rationale for the Firm

Firms exist because they are useful. Firms survive by public consent to serve social needs. If social welfare could be measured, business firms might be expected to operate in a manner that would maximize some index of social well-being. Maximization of social welfare requires answering the following important questions; What combination of goods and services should be produced? How should goods and services be provided? How should goods and services be distributed? These are most vital questions faced in a free-enterprise system, and they are key issues in microeconomics.

The reasons for the existence of the firm are manifold, such as:

  1. Concept of Transaction Costs.
  2. Government Interference.
  3. Diminishing Returns of the Management.
  4. Public Good of Information.