Microeconomic Policy

Microeconomic Policy

A New Perspective

Clem Tisdell and Keith Hartley

This thoroughly accessible textbook shows students how microeconomic theory can be used and applied to major issues of public policy. In this way, it will improve their understanding of both microeconomic theory and policy and also develop their ability to critically assess them. Clem Tisdell and Keith Hartley have expanded upon their previous successful work on microeconomics. As a result, this new book is considerably updated with substantial chapter revisions, as well as new chapters dealing with business management, ownership, environmental issues, public choice, defence, conflict and terrorism.

Chapter 7: The Behaviour of Firms

Clem Tisdell and Keith Hartley

Subjects: economics and finance, industrial economics

Extract

7. 7.1 The behaviour of firms INTRODUCTION The firm is one of the foundations of microeconomics. It acts as both a buyer and seller. Firms buy factors of production and combine them to produce goods and services. They can be privately or publicly owned, large or small in size, operating in different market structures. This does not mean that economic models of the firm are restricted to private firms in agriculture, manufacturing and services plus state-owned industries providing goods and services for sale to consumers. Other private and state organizations can be analysed as firms. Examples include banks, charities, churches, cooperatives, political parties and trade unions, together with government bureaucracies, state agencies, hospitals, schools, military bases, museums, prisons, sports centres and universities. Some of these will be non-profit organizations. Even households have elements which act as firms: they provide child production and child rearing activities as well as partnership and family support activities. Economists need to know whether the market environment, the form of ownership, and the incentives facing the managers of an organization affect the behaviour and performance of firms. To economists, firms are represented by a set of cost and revenue schedules and an objective function. This analytical framework is used to explain the behaviour of firms as reflected in their demands for labour, capital and technology and their decisions about prices, outputs and product quality. Such decisions also determine the size of firms. Traditionally, economists have analysed firms as profit-maximizers, but modern...

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