What’s the main driving purpose of a firm?

Economists tend to use the word ‘firm’ to describe most workplaces, except charities and civil service. Simply put, if a group of people who want to work in the same field and have compatible skills work together under the umbrella of a ‘firm’, that speeds things up – they share certain resources, operate from a single location with a single brand, and divide up tasks between them to create a more efficient outcome.

In economics terms, they’re lowering transaction costs – the costs of searching for the right resource, finding all the relevant information, bargaining over prices, and enforcing certain rules. Once covering a certain cost internally becomes more expensive than it would be if it was bought from somewhere else on the market, a firm has grown to capacity – unless it changed its production techniques, that’s the right size for it to become.

The objective of different firms depends on who owns them, and whose benefit they are structured to work in. Large firms are typically controlled by business managers on behalf of equity-holders – anyone who owns part of the value of a company, in the form of shares or stocks purchased on the stock market. Their reasons for investing might be security, income, philanthropy, or supporting innovation in a new kind of company they’re interested in.

Equity holders typically expect the managers of a firm to maximize their profits. It’s important to understand that economic profit isn’t the same as what we understand as profit, which is actually accounting profit. Accounting profits is simply costs minus earnings, or how much is left after a company adds up its costs and its income. Economic profit is different – it's monetary costs, minus opportunity cost, minus earnings.

But firms don’t have to be profit driven. Social enterprises, benefit corporations, and blended value organisations are just a few of the buzzwords that businesses have come up with to describe organisations driven by purpose rather than profit. If an organisation doesn’t make any profit at all, and acts purely in the name of a social cause, then it’s normally a registered nonprofit.