This thesis takes the micro-economic notion of flexibility in the firm, and seeks to describe formally its significant features. It develops a theoretical approach to flexibility in a behavioural model of the firm, following the principles set down by Herbert Simon in his work on complex systems. This approach is then applied to the small entrepreneurial firm, (S.E.F.), taking fish processing as an example. The computer implementation used models the S.E.F. as a set of linked spreadsheets. Building upon a theoretical base provided by George Stigler (1939), Herbert Simon (1962), and Richard Cyert (1963), it aims to extend our knowledge of how firms respond to sudden external change. George Stigler's short-run static analysis of flexibility in terms of the convexity of the unit cost curve is extended to take account of dynamic, behavioural and stochastic aspects. The theoretical extensions include a separation of flexibility into two elements: choice flexibility and response flexibility. Using a behavioural analysis of actual decisions taken, a model is developed in which various aspects of flexibility can be studied. Consideration is given to recent work in the flexibility field, such as Marvin Mandelbaum and John Buzacott (1990), Burton Klein (1984) and Bo Carlsson (1989), and to the impact on flexibility issues of authors such as Harold Demsetz (1988), Armen Alchian (1972) and Oliver Williamson (1986). Emphasis is placed throughout the work on the grounding of the theory in its empirical context, using behavioural data gained from fieldwork in the fish processing industry in Scotland.