The competitive firm and perfect competition
The competitive firm and perfect competition
This chapter addresses market equilibria for competitive firms, firms that act as price takers. It develops a theory which is based on the hypothesis that firms and consumers act as if they have no effect on prices; consumers choose what to consume and firms choose their production plans in the belief that the prices they see are unaffected by their decisions. There are two ways to proceed in the theory. One could continue analysis of general equilibrium in the style of Chapter 6, but with firms added to the story. Or one can undertake partial equilibrium analysis. The chapter begins with the classic partial equilibrium analysis of perfect competition. It then develops an example that shows how a partial equilibrium perspective can be misleading, before discussing general equilibrium with firms.
Keywords: market equilibrium, competitive firms, general equilibrium, partial equilibrium, perfect competition
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