The Mission of Firms [Video]

In every market, there are frictions. Frictions extend into the needs of customers which they want fixed. A hungry man in Lagos, Nigeria, has a friction which is to find food and eat. A businesswoman looking for a loan has a friction of finding capital for her business. But due to information asymmetry (one party has more material knowledge than the other), markets are inherently imperfect, making it difficult for demand (the consumers or buyers) and supply (the providers) to come into an optimal equilibrium.

To overcome these challenges – the imperfection in markets and the friction experienced by market players, establishing companies becomes important. Through companies, factors of production are organized. And that organization of factors of production produces a force called “products and services”. Through products and services, companies exert forces which overcome the “frictions” experienced by customers. This is consistent with basic physics: a friction experienced by a customer must be overcome by a force (i.e. product or service) delivered by a provider. Companies exist to create products and services to fix market frictions!

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