7. 7.1 The behaviour of ﬁrms INTRODUCTION The ﬁrm is one of the foundations of microeconomics. It acts as both a buyer and seller. Firms buy factors of production and combine them to produce goods and services. They can be privately or publicly owned, large or small in size, operating in diﬀerent market structures. This does not mean that economic models of the ﬁrm are restricted to private ﬁrms in agriculture, manufacturing and services plus state-owned industries providing goods and services for sale to consumers. Other private and state organizations can be analysed as ﬁrms. Examples include banks, charities, churches, cooperatives, political parties and trade unions, together with government bureaucracies, state agencies, hospitals, schools, military bases, museums, prisons, sports centres and universities. Some of these will be non-proﬁt organizations. Even households have elements which act as ﬁrms: they provide child production and child rearing activities as well as partnership and family support activities. Economists need to know whether the market environment, the form of ownership, and the incentives facing the managers of an organization aﬀect the behaviour and performance of ﬁrms. To economists, ﬁrms are represented by a set of cost and revenue schedules and an objective function. This analytical framework is used to explain the behaviour of ﬁrms as reﬂected in their demands for labour, capital and technology and their decisions about prices, outputs and product quality. Such decisions also determine the size of ﬁrms. Traditionally, economists have analysed ﬁrms as proﬁt-maximizers, but modern...
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