The theory of firm

The theory of the firm explains how businesses decide what to produce, how much to produce, and at what cost, to maximize profits. It considers the relationship between inputs like labor and materials, and outputs—goods or services sold. Firms aim to balance production costs with the prices they can charge, seeking efficiency. Factors like competition, market demand, and resource availability influence these decisions. Overall, the theory helps us understand how companies operate within markets to create value, make strategic choices, and respond to changing economic conditions.