An Economic Theory, Second Edition
Chapter 11: Growth and Dynamics of the Firm
11. Growth and dynamics of the ﬁrm 11.1 NATURE OF THE FIRM The ﬁrm is a unit of control. As such it is not very different from a household. Households control the uses of the goods they own in much the same way as do ﬁrms, albeit on a smaller scale. Why, then, are the activities of a ﬁrm not performed simply as an extension of the activities of a household? Why create a separate legal entity which can enter into contracts in its own right, quite apart from any contracts which have been entered into by the individuals who own the ﬁrm? One obvious reason is that ﬁrms enjoy certain legal privileges which households do not. A person who buys in order to resell may register (or incorporate) himself as a ﬁrm and thereby become entitled to set expenditures against tax, limit his personal liability for commitments entered into in the course of trade, and so on. The actual privileges acquired depend upon the form of incorporation that is chosen. A ﬁrm does not need to buy exactly the same things that it sells in order to qualify for these privileges – it is sufﬁcient that the expenditures are on inputs which are necessary in order to produce the output. It is worth noting, though, that members of a household must purchase inputs of food, shelter and so on, to maintain themselves in good health so that they can sell their labour services. However, the need for subsistence in...
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