Managerial Economics is a business unit and it is organized on commercial principles. In the process of production and sale of different goods and services, it aims at making profits. According to this theory, a traditional firm is a group with a particular organizational and management structure having command over its own property rights. It is a legal entity on the basis of ownership and contractual relationship organized for production and sale of goods and services. In olden days a firm was called by various names like shops, firms, enterprise, production and business concerns etc. But today, it is organized on various forms like a sole trader, partnership concern, Joint Stock Company, cooperative society etc. A firm is formed, run and managed by an owner, employer or an entrepreneur who has the following characteristics.
1. 2. 3. 4. 5. 6. 7. 8.
He has the legal permission to run an enterprise. He can enter in to contract with any group of people who supply productive resources. He can take his own decisions to maximize his economic gains. He is entitled to enjoy the residual income after making payments to all productive resources in the form of rent, wages and salaries and interest. He can transfer his rights and obligations to other individuals on the basis of contracts. He can direct and dictate the suppliers of productive resources in the manner he likes of course on the basis of legal contracts. He can change the nature of management according to his convenience. He has all the rights to make changes in his organization which he feels the best. He can consult others or he can take his own final decisions.
Thus, a firm is managed by a private person who centralizes all his decisions on the basis of legal contracts and makes enough profits. He has his own personal interests to run the business unit. Such a type of business unit has emerged as a dominant form of business organization over a period of time. It has its won advantages as the firm is managed by an individual. A firm managed by an individual has several advantages over other forms of organization.
1. He can take immediate and quick decisions to maximize his economic gains. 2. Direct control over the firm will ensure higher productivity, efficiency, better supervision, better performance etc. Better control and management helps him to have time-bound programs 3. He can reward factor inputs on the basis of their performance and get best services from them. 4. He adopts a flexible business policy to suit the changing conditions without any of loss of time. Thus, this form of business organization has emerged as the classical entrepreneurial firm and has become most popular over a period of time. The above mentioned features of the classical firm have been described as the theory of firm by various economists. The traditional or classical firm basically engages itself in various kinds of economic activities which help in maximizing its profits. It concentrates on wealth-creation and through it surplus creation. Surplus value is nothing but the difference between the value of the final product and the value of various inputs employed in the production process. Surplus generation is possible when the firm produces maximum output with minimum costs. Hence, a firm works out the most ideal factor combinations to EDUPROZ
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