The theory of the firm is a basic economic concept that helps describe what motivates firms to [Page 783]act within the context of two basic markets: (1) the market in which they sell products and services and (2) the market in which they purchase the resource inputs for production. This theory assumes that all firms are motivated by profit, either its maximization or a determinable allowable amount. Thus, the theory of the firm explains why firms seek to minimize cash expenses in the face of the prices they are able to command in the competitive market where they compete for limited consumer income.

This entry describes how the theory applies in the changing economic environment facing K-12 public schools. What follows is a discussion of a ...