Overview
There are two primary agents in 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.
- Firm Revenue:
the money that the firm makes from selling its product or service.
- 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 customers will demand at various price points.
- Firm Profitability: the amount of money that the firm retains 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 within the financial industry.