What Is a Firm?
Key ideas: firm as a transformer of inputs into outputs, production sets, production functions, net supply and net demand
In this chapter the focus switches to the transformation of commodities by firms. Within a firm, raw materials and other commodity inputs are processed by labor and managerial inputs to produce goods and services. These outputs may be for consumption (final products) or for sale as inputs to other firms (intermediate products). The amount of output that can be produced depends on the technology (machinery, buildings, etc.) held by the firm.
This is relatively straightforward. Consider, for example, a newsprint manufacturer. It transforms the primary raw materials of lumber, energy, and labor into giant rolls of paper ready for delivery to daily newspapers, using an array of machines. However, from a broader perspective, the machines are also inputs. In addition to purchasing labor inputs and raw materials, the firm can purchase additional capital equipment (for the same plant or to build a new plant) and so alter the set of available outputs. From this perspective, the technology of a firm is a set of blueprints for the transformation of commodities.