As you know, the company is busy finding the best condition in which it can maximize its profits. Clarification of this mechanism is the study of competition in market conditions. But what else can be said about the company, besides the fact that it maximizes its income? The theory of the firm is considered in economics from two sides.
Based on the neoclassical views on processes in microeconomics, a technological approach has been formed. He analyzes the behavior of the company and is also called functional. This approach assumes that for any combination of production factors, it is possible to determine the function that expresses the largest output at a certain level of technical development. This is the so-called production function. With its help, you can determine what proportions between resources lead to the greatest volume of production, if we take into account the ratio between costs and outputs.
The theory of the company in the framework of the technological approach is considered primarily from the point of view of its boundaries. This problem is central. The scale of production directly affects the economy of return or its increase. In accordance with this pattern, the best size of the company is one that does not lead to a sharp increase in variable costs.
Another, alternative, view of the behavior of the firm is the institutional theory of the firm. This approach does not focus on studying the conditions for improving profit, but on the phenomenon of the appearance of a company, its development and disappearance. This theory of the company, in order to explain the structure of the organization and the content, uses not only the category of the institution, but also such concepts as information asymmetry, opportunistic behavior, transaction costs, contract and resource specificity.
The company as an economic phenomenon has good reason for occurrence. When one subject wishes to enter into relations with another subject on matters relating to exchange processes, he is obliged to provide for the protection of his own interests. This can be done by concluding relevant agreements or contracts.
The conclusion of any transaction relating to the exchange is made after negotiations, during which the order of transfer of something, its price and other points are clarified. To reduce the size of transaction costs associated with negotiations, helps hierarchical construction within the company itself. That is, when the majority of employees operates within the same organization, there is no need to conclude a contract with each separately. Legal relations between employers and its employees are regulated by a single labor law.
The neoinstitutional theory of the company also investigates the problem of “principal - agent”, in which the principal is the owner of a resource, and the agent is the subject who is endowed with the rights of the owner to use this type of resource. That is, the principal transfers some powers to the agent, and he agrees to represent the interests of the principal for a fee. Examples of such relationships: land owners and tenants, legislative bodies and voters, company owners and their managers. This theory of the firm is directly related to asymmetric information and opportunistic behavior. This means that the information between the participants is not distributed equally: as a rule, the agent knows more than the principal, as a result of which the latter cannot absolutely control the actions of the former. Opportunistic behavior occurs when the functions of the manager of a firm are significantly different from the functions of its owner.
From all that has been discussed above, the following definition follows: a company is such a construction of activity that is aimed at constantly searching for the most profitable way in which it is possible to produce products even under conditions of partial certainty.