Theory Of The Firm

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Dictionary Says

Definition of 'Theory Of The Firm'

A microeconomic concept founded in neoclassical economics that states that firms (corporations) exist and make decisions in order to maximize profits. Businesses interact with the market to determine pricing and demand and then allocate resources according to models that look to maximize net profits. 

The theory of the firm goes along with the theory of the consumer, which states that consumers seek to maximize their overall utility. Modern takes on the theory of the firm sometimes distinguish between long-run motivations (sustainability) and short-run motivations (profit maximization).
Investopedia Says

Investopedia explains 'Theory Of The Firm'

The theory of the firm is always being re-analyzed and adapted to suit changing economies and markets. Early economic analysis focused on broad industries, but as the nineteenth century progressed, more economists began to look at the firm level to answer basic questions about why companies produce what they do, and what motivates their choices when allocating capital and labor.

Modern takes on the theory of the firm take such facts as low equity ownership by many decision-makers into account; some feel that CEOs of publicly held companies are interested not only in profit maximization, but also in goals based on sales maximization, public relations and market share.
Search results for

'Theory Of The Firm'

  • A Primer On Private Equity

    http://www.investopedia.com/articles/financial-theory/11/private-equity-primer.asp
    ... July 06 2011 | Filed Under » Financial Theory, Investment. Private equity (PE) has ...
    of private equity investment is direct investment into a firm, often to gain ...

  • 8 Good Intentions With Bad Outcomes

    http://www.investopedia.com/articles/financial-theory/12/good-intentions-bad-outcomes.asp
    ... April 30 2012 | Filed Under » Business, Financial Theory, Investment. In a world ...
    The firm, once a global force in its industry, employed such luminaries as ...

  • How rapidly can expanding sales reduce a firm's earnings?

    http://www.investopedia.com/ask/answers/116.asp
    ... How rapidly can expanding sales reduce a firm's earnings? In order to operate
    and make money, a company must spend money. Revenue ...

  • Cash Flow From Investing

    http://www.investopedia.com/articles/financial-theory/11/cash-flow-from-investing.asp
    ... September 30 2011 | Filed Under » Accounting, Financial Theory, Investment. Cash
    flow ... This number highlights the firm's ability (or inability) to make a profit ...

  • Understanding Leveraged Buyouts

    http://www.investopedia.com/articles/financial-theory/08/leveraged-buyouts.asp
    ... March 10 2012 | Filed Under » Business, Financial Theory, Fundamental Analysis.
    Leveraged ... current management, the employees or a private equity firm known as ...

  • An Introduction To Corporate Valuation Methods

    http://www.investopedia.com/articles/financial-theory/11/corporate-project-valuation-methods.asp
    ... Methods. July 08 2011 | Filed Under » Accounting, Business. Capital budgeting
    involves choosing projects that add value to the firm. ...

  • What Investors Can Learn From M&A Payment Methods

    http://www.investopedia.com/articles/financial-theory/11/MA-payment-reveals-alot.asp
    ... December 08 2011 | Filed Under » Business, Financial Theory. Investors can learn
    a lot about how management views the value of their firm, and the synergies ...

  • Detecting Financial Statement Fraud

    http://www.investopedia.com/articles/financial-theory/11/detecting-financial-fraud.asp
    ... Through the use of off balance sheet special purpose vehicles the firm
    continued to hide its liabilities and inflate its earnings. ...

  • Off-Balance-Sheet Entities: An Introduction

    http://www.investopedia.com/articles/analyst/022002.asp
    ... In theory, the balance sheet provides an honest look at a firm's assets and liabilities,
    enabling investors to make a determination regarding the firm's health ...

  • Valuing Startup Ventures

    http://www.investopedia.com/articles/financial-theory/11/valuing-startup-ventures.asp
    ... infrastructure and equipment may only be a small component of the actual net worth
    when relationships and intellectual capital form the basis of the firm. ...

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