Firms

Firms are recognized as significant factors of production used in economics. A firm is also referred to as a business entity that produces goods in an economy. A firm can be known as a lawfully acknowledged organizational entity, which is set up in an economy to produce goods and services for consumers.

A firm can be governed owned or can have private enterprise. There are mainly 4 types of ownership found in firms. Starting with a sole proprietorship, which is owned by an individual. In this case, the sole owner is responsible for taking decisions and also possesses indefinite individual liability of debt incurred by firms. A partnership is another type of ownership, in which two or more people come together for achieving the same goal. Here, each partner has to bear the indefinite individual liability of debts incurred by a firm.

Competitive Firm

In economics, a competitive firm is referred to that type of firm which operates under a competitive market form. This type of firm though rare in reality is widely used in forming an economic model for study of market behaviour. A competitive firm possesses certain characteristics like:

• A competitive firm is a price taker, which means that this firm cannot affect market price.
• Maximum output level for a competitive firm is where marginal cost equals marginal revenue. The firm has to shut down under conditions when revenue is less than the variable cost.
• The long-run supply curve of a competitive firm represented as a marginal cost curve that lies above minimum point of average variable cost and the short-run supply curve is the marginal cost curve lying above minimum point of average variable cost.
• The demand curve for a competitive firm is horizontal in form, which is corresponding to the price of firm.

Monopolistic Firms

Monopolistic firms produce non-homogeneous or differentiated products in the market. Since firms produce different products, they possess some kind of market power. Monopolistic firms can raise prices for their products without losing their customers. The demand curve for a monopolistic firm will be downward sloping and elastic due to the presence of close substitutes.

A monopolistic firm can earn abnormal profits, normal profits or even incur an excessive loss. When the average revenue curve is greater than the average cost curve, it is an abnormal profit, again when the average revenue curve is equal to the average cost curve, there are normal profits. When the average revenue curve is less than average cost curve, there is a loss. These are conditions for short term equilibrium of any monopolistic firm.

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