Theory Of The Firm
Categories: Financial Theory
See: The Firm. Read The Firm. Be The Firm.
Neoclassical economics came up with the theory of the firm: firms do what they do to maximize profits. Much simpler than theorizing why people do what they do.
Since the theory of the firm says that firms are all about profits, it involves two things: raising money coming in (revenue) and lowering money going out (costs). The larger the gap between revenue and costs, the larger profits are.
Ironically, for many businesses, it's in their profit-maximizing interest to not talk about their profit-maximizing aims so much. Sure, that’s important for shareholders...but what about companies that advertise their “fair trade” coffee and their “buy-one, give-one” philanthropic endeavors? For some companies, those things raise revenue. Rule number one for firms.
The TL;DR of the theory of the firm: follow the money.
