Chapter 5: Some basic tools of economics: firm behavior, supply, and equilibrium in a market
An underlying theme of this book is transactions. Our closer look at the decision to transact has begun with the one most familiar to most of us, namely, buying and selling consumer goods such as bottles of wine. We have already discussed the consumer side of that transaction, and we turn now to the supplier of those goods. Who supplies the goods that consumers want? One way or another, they are producers—organizations (“businesses”) that acquire and manage productive resources from raw materials and employees to machines, land, structures, and advertising to produce and sell goods usually to make a profit which, for now, we consider to be sales revenues exceeding production costs. In this chapter, we analyze supply behavior and then put buyers and sellers together to see how the market works. While the demand side of markets tends to be relatively unorganized, industry structure on the supply side can make a difference, and we discuss that. We close the chapter with a discussion of the challenge of asymmetric information.
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