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A Course in Microeconomic Theory$
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David M. Kreps

Print publication date: 2020

Print ISBN-13: 9780691202754

Published to Princeton Scholarship Online: May 2021

DOI: 10.23943/princeton/9780691202754.001.0001

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PRINTED FROM PRINCETON SCHOLARSHIP ONLINE (www.princeton.universitypressscholarship.com). (c) Copyright Princeton University Press, 2022. All Rights Reserved. An individual user may print out a PDF of a single chapter of a monograph in PRSO for personal use.date: 06 July 2022

The competitive firm and perfect competition

The competitive firm and perfect competition

(p.263) Chapter Eight The competitive firm and perfect competition
A Course in Microeconomic Theory

David M. Kreps


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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