The Difference Between Economics in Firms & Industry
The terms "firm" and "industry" are misunderstood by many and are sometimes used interchangeably. However, the words describe different concepts and are not interchangeable. Find out how firms relate to industries and how you can take the pulse of an industry to know when it’s time to raise or lower your prices.
There are two distinctions to be aware of when considering the word "firm." The first is that in some parts of the world, firm simply means business, and you can use these two words interchangeably. However, the word is also used to describe companies such as law firms that provide judicial services.
A firm can be a partnership or a sole proprietorship, but it is typically a for-profit operation. A firm operates within an industry. For instance, a business-to-business law firm that defends other businesses and a law firm that works for one-on-one private clients both operate within the legal industry.
In economics, a country’s economy is broken down by type of output. These distinctions are what we call industries. Examples of profitable industries in the U.S. include:
- Legal Services
- Real Estate
- Outpatient care centers
- Offices of health care practitioners
A distinct industry consists of all the businesses, or firms, that are involved in the production and sale of a specific product or service. It’s important to note that industries can be either retail, wholesale or service. Retail industry consists of firms that sell products directly to customers, while wholesale firms sell products to other businesses. Service industries provide a service to an individual or another firm. Examples include the insurance industry and the banking industry.
The difference between the two is that firms make up industries. Put another way, an industry consists of several different firms selling similar products. An industry is not a discrete entity, but a firm is. Finally, an industry is a subsector of a country’s economy.
Firms servicing the same industry compete with one another. This competition helps keep prices down and customer satisfaction higher than it otherwise would be. When consumers have a choice, firms are incentivized to keep customers happy.
If you’re looking for an edge for your small business, you may find it helpful to study the macroeconomic factors within your industry. This is known as industrial economics. For instance, understanding how supply and demand works at both scales can help you predict necessary price changes.
At the industrial level, supply refers to the total output of an entire industry, while at the firm level, it refers to the total inventory of a particular company. At the industry level, if supply is higher than demand, you and your competitors will probably have to lower your prices so you can compete with one another.
Knowing that this is a possibility before your competitors realize it can help because you’ll have time to lower expenses elsewhere in the business. Cutting costs can help you maintain your profit margin in lean times. Consequently, you should analyze the supply trends of your industry on a regular basis.
Similarly, you should keep an eye on demand trends at all times. If demand slips, you could find yourself in a precarious situation. On the other hand, if you see demand rising faster than supply in your industry, you might anticipate being able to raise your prices. In such a scenario, it makes sense to attempt to capture greater market share. Typically, this takes the form of an aggressive marketing campaign.
Industries are made up of firms, or companies, that compete with one another for market share. While this competition may be frustrating, on the whole, it’s a good thing since it provides motivation to keep customer satisfaction high.