THEORY OF FIRM

“A firm is an entity that draws various types of

factors of production in different amounts from the
economy, and converts them into desirable output
(s), through a process with the help of suitable
technology”

Economists have identified five factors of

production, namely land, labour, capital, enterprise
and organisation. The process of identifying the
potential sources of the factors such as land, labour
and capital, collecting them in required quantities
and assigning them specific task as per their skill is
the subject matter of organisation.
Forms of Ownership
Figure illustrates the major forms of ownership.

Forms of Ownership

Private Sector Public Sector Joint Sector

Individu Collectiv Compan Corpora Departm

y tion ent
al e

Propriet Partnersh
ip
Compa
ny
Cooperati
ve

orship

Private Sector (Wholly owned by People , Individually or as a group)

Public Sector (Owned, Managed and controlled by Govt.
Joint Sector (owned and managed jointly by individuals & Govt.
Private Sector: When ownership is in the hands of individuals,
whether independently , or as a small group, or in a large
number, without any investment from the Govt., then the setup is
referred to as private sector.
Supporters of the public sector argued that private investors
would invest only in those areas in which returns are high and
also gestation period is small: Hence Government should step
into economic activities in order to ensure equal distribution
economic resources and balance growth of the economy.
Various types of business organisation that may exist under
private section in the following sections Private sector has
following categories :

Sole proprietorship: Sole proprietorship firm is one in which an
individual invests own (or borrowed) capital, uses own skills in
management, and is solely responsible for the reslts of
operations. For examples , retail outlets, restaurants, hotels,
small industry
Advantages :
a. Simple and easy to start or exit b. Undivided Profits
c. Secrets of trade d. Prompt decision making
e. Personal touch to business
Disadvantages :
d. No separate entity of firm
e. Unlimited liability
f. Limited availability of funds


g. Uncertain life of business

Partnership: Partnership is “relation between persons who have
agreed to share the profits of a business carried on by all i.e.
Two or more individuals collectively decide to start a common
business. For examples sons a& Brothers or Ratanlal Maganlal
& sons.
Characteristics of Partnership “
1. Association of two or more persons
2. Agreement to voluntarily form partnership
3. Business carried out by all or any one acting for all
4. Partnership deed
Advantages :
a. Easy formation b. Strong credit position
c. Shared risk d. Shared wisdom and resources
Limitations
d. Uncertainty life of firm b. Unlimited liability

c. Dissents and distrust d. Insufficient funds