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Understanding economic data: The balance of payments

Exploring the theory of the firm

Should firms think about long-run, rather than short-run, profit maximisation? The ‘theory of the firm’ is a microeconomic concept that states that firms are driven by profit. David Williams discusses why and how they may adopt a ‘stakeholder’ rather than ‘shareholder’ approach to maximise this reward

A ‘stakeholder orientation’ approach to running a business is likened to spinning plates
© conceptualmotion/

economies of scale, business growth, revenue, costs, profit, theory of the firm, market structures, anti-competitive practices, contestability, business objectives, efficiency

In the study of economics, especially at A-level, you will become well accustomed to the idea that all private-sector organisations are motivated to maximise profit, irrespective of their size, type or the degree of competition in the market they operate in. This primary motive is the central assumption of a microeconomic concept called ‘the theory of the firm’. It applies to every business, ranging from a burger van operating alongside numerous other burger vans as a sole trader selling virtually identical fare outside a football ground on matchday, to a giant multinational company with monopolistic power across a variety of global markets.

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Understanding economic data: The balance of payments

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