Function of a Firm

Economists generally consider individuals and firms as the fundamental participants in a market economy. Individuals are resource owners who have the necessary inputs for production process - they are owners of capital, land, labour, managerial ability and raw material. They receive remuneration known as factor payments, which are used to satisfy their consumption demand for goods and services.

The function of a firm is to purchase resources or inputs or factors of production namely labour, land, capital, managerial talent and raw materials in order to transform them into goods and services for sale. 

In the product market, individuals demand goods and services to satisfy consumption desires by bidding and firms anxious to earn profits supply them. Production techniques and input cost of firms influence the supply at a good or service and consumer preferences and income determine the demand. Interaction of demand and supply determines the price and quantity sold. In the factor market, individuals supply labour, land, capital, managerial talent and raw materials that are hired by the firms to produce goods and services.

Prices of goods and services are set in the product market where they are exchanged. The factor market determines the remuneration to be paid to factors of production or the factor payments. Prices and profits serve as the signals for regulating the flows of money and goods through product market and flows of money and resources through factor market.

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