A producer uses raw materials, capital, and labor to produce goods and services. Here, we will present a simple model for how they decide how much to produce and which technology to use for production. A large part of producer theory is very similar to consumer theory.

When we have studied equilibria so far, it has always been so-called partial equilibria. (A partial equilibrium is one where we assume that “everything else is unchanged.”) However, we have also seen that a change in one variable can lead to changes in many other variables, so the restriction that everything else is unchanged may not be very realistic.

We begin our study of microeconomics by looking at a market with many buyers and sellers, i.e. a market where there is a large amount of competition. We will study such a market in more depth in Perfect Competition, as well as other market types, but starting here makes it easy to get a feel for how the subject works.


The Demand Curve

Perfect Competition

So far, we have discussed how the consumers make their decisions, and what the producers’ production possibilities and cost of production look like. The consumers often take prices as given and choose quantities based on the prices. The question is how prices arise. One factor is, of course, the cost of production.

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