The Determination of Relative Prices: General Equilibrium
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The preceding chapters have described the roles of consumer preferences and firms’ behaviour in the determination of the prices of commodities and inputs. All the analysis so far has been conducted in terms of particular assumptions about the state of economic markets. In particular, it has been assumed that firms are price-takers such that no individual firm can influence the price of the product he sells by varying the quantities he produces. We retain this assumption of perfect competition for this chapter. Although each individual firm and each individual consumer has no control over commodity and input prices under perfect competition, it is none the less true that the total supply and total demand for each commodity and input determine their respective prices. That is, prices are constants for each individual producer and consumer, but variables for all of them.
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