Defining a firm

Firms are interesting economic agents, being celebrated for their achievements, and creating wealth and innovative products and services unthought-of a decade earlier. However, certain firms are viewed as a source of division, responsible for increasing inequality in society. Some firms provide us with basic goods we routinely buy every week, like a pint of milk, to which we may give little thought about how it is produced. Other firms are seen as all-powerful, like those in energy, health care or defence, able to move the opinion of national governments and sometimes, it is claimed, to ride roughshod over social and personal needs. Firms are controversial, important, and a fascinating part of any attempt to understand economic behaviour. In spite of such variation, we can give an economic definition of a firm that takes account of this diversity.

We can define a firm as an organisation that purchases, combines and transforms factor inputs (such as land, labour and capital) into outputs of goods and/or services for sale.