The Nature of a Firm
The term “Business” can mean many things and imply many things in many different contexts. In the United States, a business can be defined as any entity organized for the purpose, effect, or use of a business. A business can be domestic or involve a foreign corporation. It can also be an individual or a partnership and have shares classified as equity or property. A business can also be operated by members or by an agent or an officer of a corporation.
Every business exists to make profits. Profits are derived either directly from sales of products and/or services and indirectly through a distribution system. The profit generated depends on the following four factors: the cost of capital goods sold, the value of services purchased, the location of the production and the services provided and the customer satisfaction. If all four factors are satisfied, the profit will be termed “A”. If one or more of these four factors is missing, the profit will be termed “B”. The value of the production and the services provided are referred to as the cost of goods sold, while customer satisfaction refers to the satisfaction level of customers.
Other terms commonly used to refer to business activities include operating, marketing, finance, selling, buying, building and development, research and development, and selling. All these terms are used because each firm has its own way of doing things, operates in specific ways and ultimately generates profits and loss. The nature of a firm also determines profit. For example, a producer who produces physical goods such as food, beverages, clothing, etc., earns a sale when he receives a customer at his place of business. He may incur expenses in building his factory and operate it in order to produce the goods, hire workers, purchase raw materials and operate the business.