Edited by Dimitri B. Papadimitriou
Chapter 4: The Theory of the Firm in Relation to Business Cycle Theory
4. The theory of the ﬁrm in relation to business cycle theory If non-linear accelerator type models are to be used in business cycle theory, it is necessary to understand the process by which a change in income induces investment and whether or not the eﬀect of a change in income upon investment varies systematically over the business cycle. We will examine the hypothesis that the eﬀect upon investment of a change in income depends upon the relation between investment decisions of individual ﬁrms and (1) the structure of the product markets in which the ﬁrm is operating and (2) the ﬁnancing conditions which confront the ﬁrm. This leads us to a study of the investment behavior of business ﬁrms. Market structures determine two relations for a ﬁrm: (1) the relation between the particular demand curve confronting the ﬁrm and the market demand curve and (2) the way in which a ﬁrm behaves toward its particular demand curve. Market structure is the manner in which the market for a product is organized. Organization is really an improper description of the concept as no formal organization of producers or consumers need exist. Aside from the generalization of cost curves to allow for ﬁnancing conditions, we do not need anything more than the traditional analysis of competitive and monopolistic markets.1 Oligopoly, the region between competition and monopoly, does cause us concern, and we will have to set up a working model of such markets. Financing conditions include the eﬀects...
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