Firms

A firm is an organization that employs resources—labor, capital, and information—to produce goods or services intended for sale, with the aim of earning profits or other value for owners. Firms coordinate production and exchange more efficiently than markets in some cases by organizing tasks, integrating inputs, and reducing transaction costs. They vary in size, scope, and legal form, from sole proprietorships to corporations and limited-liability entities.

Economists describe why firms exist in terms of costs and incentives. The theory of the firm emphasizes that firms internalize transactions that would be costly if arranged repeatedly in the open market, thereby reducing negotiation, enforcement, and information costs. The boundaries of a firm are the decisions made by its owners or managers on what to produce, how to produce, and with whom to trade.

Firms come in various legal forms: sole proprietorships, partnerships, corporations, and modern variants such as limited-liability companies. Corporate governance structures typically involve a board of directors and professional managers, with ownership shares that may differ from control rights, leading to agency considerations.

In the economy, firms allocate resources, employ workers, invest in capital, innovate, and compete in markets. They operate within legal and regulatory frameworks, face taxes, and must balance profitability with other objectives such as sustainability or stakeholder concerns.

Common challenges include agency problems, information asymmetries, and market or regulatory risks. The size, scope, and strategies of firms reflect industry structure, technology, and institutional context.