Competitive Equilibrium

Abstract

In our discussion of competitive firms we assumed that there is a large number of firms active in the market. In real economies, however, the number of firms that can successfully compete is often rather limited. In this chapter, we develop a model to determine the number of competitive profit-maximizing firms that can be supported with a given demand curve. Here we learn that the simple production function of the previous chapters can no longer be used. That production function is incapable of providing the necessary diminishing output with respect to more input and an average cost (AC=C/Q) curve with a minimum value. A more complicated functional form is required even though most microeconomics is done with the simpler version.

The only stable foundation of most of the improvements in social life is AgricuIture. —Joseph Priestley, Lecture on History