Overview: The Firm and Its Constraints

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Although economists are interested in many cases of unintended consequences, those unintended consequences that involve businessmen seeking their own gain have been at the heart of economic analysis since Adam Smith. Smith noted that

"It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interests. We address ourselves, not to their humanity but to their self love, and never talk to them of our necessities but of their advantages."

Since Smith, a great deal of intellectual effort has gone into exploring the question of under what conditions the interests of society will be served by businessmen seeking to make a profit--in fact, this is the core of microeconomics. The reading selections present background material to this exploration by explaining a large number of technical terms that economists use, and also by looking at a few of the simplifying assumptions they generally invoke.

After you complete this unit, you should be able to:

  • Define production function, isoquants, marginal product, price discrimination, monopsonist, and the all-or-nothing demand curve.
  • Define increasing, decreasing, and constant returns to scale.
  • Distinguish between income and substitution effects.
  • Distinguish between an individual buyer's demand curve and the industry demand, and between industry demand and the demand curve facing an individual seller.
  • Compute marginal revenue from the demand curve of the seller when that demand curve is given in the form of a table.
  • Compute marginal resource cost from the supply curve of the buyer when that supply curve is given in the form of a table.
  • Explain why marginal resource cost equals price for a buyer who is a price taker.
  • Explain why marginal revenue equals price for a seller who is a price taker and why marginal revenue is less than price for a seller who is a price searcher.
  • Explain what the law of diminishing returns is and under what conditions it holds.
  • Explain why the demand curve, the supply curve for resources, and the production function can be treated as boundaries.
Copyright Robert Schenk