What is Theory Of The Firm?
In economics, theory of the firm is a postulation trying to predict how businesses will act based on what the theory claims the goal of the firm or business is. In this case, it states that all decisions are made with the final goal of maximizing profits. While this may seem like a statement of the obvious, the theory of the firm helps predict and explain other types of decisions made in an organization. For example, while many may not understand why a firm would not mind getting the bad publicity that comes with shutting down factories in one country and moving them to another country where labor is cheap and plentiful, the theory of the firm would, in fact, predict just such an occurrence. If the ultimate goal of the company is to maximize profit margins, then finding the cheapest way to produce their products is understandable. The theory of the firm does not allow for benevolence such as being a good corporate neighbor. The theory of the firm, therefore, may also help explain why s
