What is a firm?
A firm is an organisation that brings together the factors of production (land, labour, capital and enterprise) to produce goods or services for sale. Firms exist because specialisation and division of labour enable people to be more productive when working together than alone. Entrepreneurs co‑ordinate resources, take risks and organise production in order to make a profit.
Objectives of firms
The most common objective is to maximise profit, but in practice firms may pursue a range of goals depending on their ownership, size and market environment:
- Profit maximisation – producing at the output where marginal cost equals marginal revenue.
- Revenue or sales maximisation – seeking to increase market share and brand recognition.
- Growth – expanding the size of the business to exploit economies of scale.
- Survival – particularly during recessions or when the firm is new.
- Ethical and social objectives – such as environmental stewardship or fair treatment of workers, often pursued by cooperatives and social enterprises.
Types of firms
Firms can take many legal forms. The table below summarises some common types and their key features.
| Type of firm | Key features | Typical examples |
|---|---|---|
| Sole trader | Owned and run by one person; unlimited liability; profits kept by owner | Small shops, freelancers, tradespeople |
| Partnership | Owned by two or more partners sharing profits and responsibilities; unlimited liability (unless limited liability partnership) | Accountancy firms, medical practices, law firms |
| Private limited company (Ltd) | Separate legal entity; limited liability; shares not traded publicly | Family businesses, small manufacturers |
| Public limited company (PLC) | Shares traded on a stock exchange; limited liability; subject to greater regulation | Large corporations such as multinational banks or car makers |
| Co‑operative/social enterprise | Owned and run for the benefit of members or a community; profits reinvested for social goals | Food co‑ops, fair trade organisations |
Why firms differ in size
Firms can range from tiny sole traders to multinational corporations. Size is influenced by several factors, summarised below.
| Factor | How it affects size |
|---|---|
| Economies of scale | Firms may grow large to exploit lower average costs from bulk buying, technical efficiencies and managerial specialisation. |
| Access to finance | Firms with greater access to capital (e.g. through stock markets or venture capital) can expand more easily. |
| Market size | Demand for a product determines how large a firm needs to be. Niche markets often support small firms. |
| Regulation and bureaucracy | Some industries (e.g. banking) require significant compliance costs, favouring larger firms with resources to meet regulations. |
| Owner objectives | An owner may choose to remain small to retain control and flexibility rather than pursue rapid growth. |
Examples and applications
In a small town, a family‑run bakery operates as a sole trader. The owner uses her own savings to rent a shop (fixed cost) and buys flour, sugar and eggs (variable costs) each week. She aims to make enough profit to pay her bills and support her family, rather than to dominate the market. In contrast, a global technology company like Apple is a public limited company with thousands of shareholders. It invests billions of dollars in research and development and sells millions of devices worldwide. Its objectives include profit maximisation, market share, brand reputation and social initiatives such as environmental sustainability.
Social enterprises show that firms can pursue ethical objectives alongside profits. For example, TOMS Shoes operates a “buy one, give one” model where for every pair of shoes sold, a pair is donated to a person in need. This illustrates how firms can incorporate social goals into their business model.
