Although they appear synonymous and are often used interchangeably, there is a difference between a firm and a company. A company can be any trade or business in which goods or services are sold to produce income. Further, it encompasses all business structures, such as a sole proprietorship, partnership, and corporation. On the other hand, a firm typically excludes the sole proprietorship business; it generally refers to a for-profit business managed by two or more partners providing professional services, such as a law firm. In some cases, a firm can be a corporation.

Types of Firms

A firm’s business activities are typically conducted under the firm’s name, but the degree of legal protection—for employees or owners—depends on the type of ownership structure under which the firm was created. Some organization types, such as corporations, provide more legal protection than others. There exists the concept of the mature firm that has been firmly established. Firms can assume many different types based on their ownership structures:

A sole proprietorship or sole trader is owned by one person, who is liable for all costs and obligations, and owns all assets. Although not common under the firm umbrella, there exists some sole proprietorship businesses that operate as firms.

A partnership is a business owned by two or more people; there is no limit to the number of partners that can have a stake in ownership. A partnership’s owners each are liable for all business obligations, and together they own everything that belongs to the business.

In a corporation, the businesses’ financials are separate from the owners’ financials. Owners of a corporation are not liable for any costs, lawsuits, or other obligations of the business. A corporation may be owned by individuals or by a government. Though business entities, corporations can function similarly to individuals. For example, they may take out loans, enter into contract agreements, and pay taxes. A firm that is owned by multiple people is often called a company.

An industry refers to a collection of firms engaged in the production of a similar or related goods and services (commodity). For some industries there is only one firm and for others there is more than one firm.

In macroeconomics, an industry is a branch of an economy that produces a closely related set of raw materials, goods, or services.[1] For example, one might refer to the wood industry or the insurance industry.

Equilibrium of a firm

Equilibrium of a firm refers to a point of profit maximization where the firm has no tendency to increase or reduce its level of output during production.

Or Refers to a point where a firm’s marginal cost equals to marginal revenue (MC=MR).

Equilibrium of an industry

Equilibrium of an industry refers to a situation where there is no tendency of new firms entering or old firms leaving the industry.

[Equilibrium of an industry occurs when its size has no tendency to change (neither expanding nor contracting). At this point all firms are earning normal profits—there are no abnormal profits to attract new firms and there are no losses to lead to exit of the firms within the industry].

Objectives of a firm

Profit maximization objective. This is the major objective of most firms and involves a firm making as much profits as possible. The total revenue must be greater than total cost.
Sales/revenue maximization. This involves a firm aiming at producing much output and to sell the output as much as possible to enjoy much revenue (even though profits made are less).
Market share objective. Some firms are interested in maintaining or increasing their market share (controlling the market) by producing a variety/ a range of products and being dominant.
Long run survival in the industry. Some firms aim at maximizing chances of their survival in the market for a long time. They do this partly by producing a variety of products and efficiently.
Maintaining a good image in the public. Some firms aim at a good public image and serving as a useful part to the community even when they are operating at a loss.
Promoting national interests. Some firms aim at acquiring prestige and national interest like providing employment, providing security, providing essential goods (like safe water). These are usually publically-owned firms.
*Provision of essential goods and services. This is the objective of government firms. These aim at providing the community with important services at cheap price such as medical facilities.
Restricting entrance of new firms into the industry. Some firms aim at limiting entry of new firms into the industry by setting low prices for their goods, which makes the production process expensive for infant firms and later they are kicked out of production.

Decisions of the firm

Firms make decisions on what to produce, how to produce, how much to produce, for whom to produce, where to produce, when to produce, distribution method, and determining the price of the product.

Factors that influence production decisions of a firm

Objectives of the firm. Firm with objectives to grow/ expand employ more resources to maximize output while firms with decisions to make profits reduce output so as to charge high prices.
Size of the market. Presence of a large market for output encourages investment decisions while limited market discourages investment decisions.
Level of technology used. More efficient techniques of production encourage investment decisions while underdeveloped technology discourages the investment decisions.
Level of internal organization of the firm. Good internal organization leads quicker decision-making regarding production while poor organization makes it difficult to make production decisions.
The ease of entry of new firms into the industry. Firms invest more with provision of freedom of entry into the industry while restricted entry limits investment decisions.
The price level of goods and services produced. High price for products leads to quicker decision making for a firm to invest in order to maximize returns while low price for output limits the decision to invest.
Government policy towards investment such as taxation and subsidization. Unfavourable policies such as higher taxation and reduced subsidization discourage investment decisions while favourable government policies such as low taxation and increased subsidization of firms encourage investment decisions.
Level of entrepreneurial ability. High level of entrepreneurship encourages/ enhances investment decisions while low level of entrepreneurship discourages investment decisions.
The existing stock of capital. Presence of a large capital stock encourages investment decisions while limited capital stock discourages investment decisions.

Location of an industry/ firm

Location of an industry refers to a place /site where an industry is established.

Or location is the establishment of a firm / business unit in a particular area.

Factors that determine the location of an industry/ firm

Availability of raw materials. Firms that use bulky raw materials which are costly to transport are attracted near to the source of raw materials such as Tororo cement factory, Hima cement factory in Kasese, saw mills near forests, brick making firms near clay. However, firms that use light raw materials which are cheap to transport are located in various places.
Availability of market for the product. Firms find it economical to be located nearer to the market so as to reduce the cost of transport of finished products. This is for products that are difficult to transport such as breakables, perishables (like confectionery, newspapers) and direct services (like salons, garages).
Availability of source of power. Firms using large amounts of power are located near power plants. However, this is gradually changing since power is being extended to various areas and hence firms are being located in various areas.
Availability of cheap labour. Many firms are located where there is adequate supply of cheap labour especially in the urban areas. (The cost of labour is an important factor in industrial location). However, firms which are capital intensive are located in the area determined by the entrepreneur.
Level of development of transport infrastructure. Many firms are located in urban areas or near developed transport routes to enable easy movement of raw materials to the factory or finished goods to the market.
Availability of water supply. Some industries are located near water sources because they need water for cooling machines and others use water as an input. However, firms which do not greatly depend on water supply are located in other areas.
Cost and availability of land (especially for future expansion). Presence of cheap and extensive land encourages the setting up and future expansion of firm such as those with heavy investment or those engaged in farming. However, firms which require limited land area are set up in various areas.
Government policy towards location of firms. Government influences (encourages or discourages) the location of firms for a number of reasons such as balanced regional development, creation of employment, discouraging rural-urban migration, home of government leaders among others.
Entrepreneur’s choice. The entrepreneur sometimes makes an irrational decision without considering economic benefits such as locating a firm in one’s birth place for prestigious reasons or to create employment to family members and relatives.
Political climate. Most firms are located in places which are politically stable since they are assured of the safety of their investments. However, many firms are discouraged from setting up in areas of insecurity since they fear the risk of losses.
Availability of commercial services. Most firms are located in areas with developed commercial services such as banking, insurance, ware housing, marketing and advertising agencies. However, places with less developed commercial services do not attract firms.
Industrial inertia.

Industrial inertia refers to the tendency of industries to remain in a given location (where other industries exist) even when the factors that attracted them to that location no longer exist.

This is due to the presence of established infrastructure, availability of skilled labour already used to industrial life and the high costs of relocating.

ASSESSMENT

Qn. Mention any four reasons why the government should influence the location of an industry?

To encourage the exploitation of some resources.
To create more employment opportunities
To ensure balanced regional development in the country.
For strategic reasons
To fulfill political obligations
To avoid unnecessary duplication and wastage of resources
To control monopoly tendencies
To facilitate/influence income distribution.

S.5 ECONOMICS

LESSON 1

A FIRM