The individual firm plays a critical role both in theory and in the real world. It straddles two basic economic institutions: the markets for resources (labor, capital, and land) and the markets for goods and services (everything from trucks to truffles). The firm must be able to identify what people want to buy, at what price, and to organize the great variety of available resources into an efficient production process. It must sell its product at a price that covers the cost of its resources, yet allows it to compete with other firms. Moreover, it must accomplish those objectives while competing firms are seeking to meet the same goals.

How does the firm do all this? Clearly, firms do not all operate in exactly the same way. They differ in organizational structure and in management style, in the resources they use and in the products they sell. This chapter cannot possibly cover the great diversity of business management techniques. Rather, our purpose is to develop the broad principles that guide most firms' production decisions.