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Economic Theory

We have many firms in our country, and all of them behave in
different ways. Some are extremely competitive, while others are not so
competitive. Some companies sell similar products; others sell very
different or original products.

Any generalization is difficult because of the number of companies
that exist. Without some means of simplification, we would have to

consider hundreds of thousands of firms every time we wanted to discuss
the supply side of the market.
Economists have devised a classification model based on producing
and selling environments. There are four possible categories or market

structures: perfect or pure competition, monopoly, oligopoly, and
monopolistic competition.
Maximizing Profits. Firms use a combination of resources to produce

a good or a service to sell on the open market. A firm’s value increases if
its resources are paid for and it has monetary value left over. Adding value
is an objective for profit as well as nonprofit organizations. The purpose of
a profit-oriented firm is to maximize profit. The purpose of a nonprofit

organization is to create an output that is more valuable than the cost of
inputs. For instance, a temporary aid shelter is a nonprofit organization.
The shelter gives needy families food and monetary assistance. The cost of

running the shelter is outweighed by the added value of the shelter. The
shelter’s outputs, or in this case assistance to families, has a higher
monetary and non-monetary value than the costs of its inputs. Adding
value is the purpose of business activity. In the long run, organizations that

fail to add value will not survive. Inefficient decisions and allocations will
eventually be replaced or overturned by more efficient ones.

Measuring added value can be difficult for some firms. Nonprofit
firms have a more difficult time measuring added value than do profit-
maximizing firms. Added value still remains the goal of both, regardless of
the difficulty. Inputs consist of four general groups: land, labor, capital,

and entrepreneurship. The cost of each is:
 Rent = Landowners

 Wages and salaries = Workers
 Interest = Owners of capital
 Revenue/profit = Entrepreneurs

With every factor of production there is a monetary and a
nonmonetary cost. The nonmonetary cost comes in the form of opportunity
costs – the amount necessary to keep the resource owners from moving the

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