Modeling the Firm
Overview
There are two primary agents the standard microeconomics: the consumer and the firm.
The primary thing that a firm does, is to produce goods and services, which it then sells to consumers.
Modeling the firm can be broken down into the following.
- The Firm's Production Function: which measures how much the firm can produce for a given set of inputs.
Production can be view from two different angles:
- Customer Demand: is the amount of product that cusomers will demand at various price points.
- Firm Revenue:
the money that the firm makes from selling its product or service.
- Firm Profitability: the amount of
money that the firm retians after paying its expenses.
- Firm Valuation
- a theoretical fair price for buying a firm.
Markets
Markets describe the environment that a firm operates in.
- Competitive:
a market with lots of participating firms with similar products. Firms find it hard to earn an profit
in such a market.
- Monopoly:
is a market in which the firm is essentially the only player. In such a market, the monopoly has a certain freedom in
choosing the price it wishes to charge.
Porters Five Forces:
discusses the five force framework that summarizes the forces present in an industry which help to
determine a firms profitability.
Industry Specific Models
Some industries have unique characteristics such that they depart in meaningful ways from the standard model of the
firm. The typical example of this are firms in the financial industry.
