On The Internet:
Though 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.
The business firm is the productive unit in an exchange economy. In order to survive, a firm must deal with three constraints: the demand for its product, the production function, and the supply of its inputs. When the firm successfully deals with these constraints, it makes a profit.
These readings explore the assumption that firms maximize profits, pointing out some of the ambiguities of this assumption. It then explores how the rules of maximization apply to the firm. Much of this material is quite technical, but it is at the core of microeconomics. The unit closes with a section that shows how this theory can help critique proposals that sound good, but that are flawed because they ignore the theory developed in this unit.
After you complete this unit, you should be able to: