Firm : An Economic Entity

• People have many wants, such as food, clothes, housing, and transport.
• To satisfy these wants, the economy uses limited (scarce) resources to produce goods and services.​

• In economics, the main decision-maker about production is called a 'firm' or 'producer'.
• A firm is an economic unit (business organisation) that uses factors of production to produce goods and services and sells them to consumers to earn profit.​
• The desire to earn profit motivates firms to produce goods and services.

• Factors of production are basic inputs used in production:
  (i) Land (natural resources),
  (ii) Labour (human effort),
  (iii) Capital (machines, tools, buildings, money invested) ,
  (iv) Entrepreneur (organiser and risk-taker).​
• When households supply these inputs (for example, labour) to firms, they are providing “factor services”.
• Firms pay households for these factor services as wages, rent, interest, and profit.

A firm is the basic production unit in an economy and performs two major functions:

Function 1: Buyer of factor services

• A firm buys or hires factor services mainly from households and sometimes from other business units (e.g., renting machines, taking loans).
• It combines these factor services to carry out production.

Function 2: Producer and seller of goods and services

• The firm transforms inputs (factors of production) into outputs (goods and services).​
• Some firms produce goods like food, clothing, and cars.
• Other firms provide services like banking, education, transport, and healthcare.

1. Firms can be very small, such as:
   Grocery shops, vegetable vendors, small bakeries, local restaurants.
2. Firms can also be very large companies, such as big industrial groups (for example, Reliance Industries Ltd.).​
3. Both small shops and large companies are firms because they produce and sell goods or services.

Example: A bakery buys flour, sugar, and ovens and hires workers to bake cakes, then sells the cakes to customers.

This bakery is a firm because it:

• Uses resources (land, labour, capital, entrepreneur).
• Produces goods (cakes).
• Sells them in the market to earn profit.​

• A firm is an economic unit/business that organises factors of production to produce goods and services and sells them to earn profit.​
• Firms buy factor services (land, labour, capital, entrepreneur) from households and other firms.​
• Firms transform inputs into outputs and decide what to produce, how much to produce, and at what price to sell.​
• Firms can be small (shops, small businesses) or large (big companies).
• Common types of firms are sole proprietorships, partnerships, and companies/corporations.