What is The Theory of the Firm in Economics?

The Theory of the Firm is seen for many as one of the fundamental pillars to neoclassical economics.

• The Theory of the Firm states that the sole reason why a company is created is to maximize its short-run and long-run profitability. Therefore, all strategic decisions taken by the firm are driven by the motivation of increasing revenues while decreasing costs (i.e. maximizing profit). The Theory of the Firm therefore creates an underlying assumption that helps explain a variety of corporate decisions, such as which markets to enter, how many units to produce, and how many workers to hire.