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Theory of the Firm

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A Teaching Topic in Economic Analysis 

Theory of the Firm

This course introduces students to the basic principles of the theory of the firm in microeconomics. This topic examines how economic theory predicts that profit maximizing firms will behave in a variety of different circumstances. Students are introduced to a number of key concepts that are essential for the economic analysis of public policy including: profit maximization, firm supply, industry supply, cost minimization, cost curves and technological constraints on production.

Topic Learning Outcome: Appropriately utilize and interpret results of applying the theory of the firm to the analysis of public policy and management problems.

Core Concepts Associated with this Topic: Average Cost, Budget Constraint, Budget Line, Budget Set, Decreasing Returns to Scale, Demand Function Facing the Firm, Diminishing Marginal Product, Discount Rate, Division of Labour, Economic Rent, Endogenous Variable, Exogenous Variable, Factor Demand Curve, Factors of Production, Increasing Returns to Scale, Isoquant, Jensen's Theory of the Firm, Monotonic Property of Technology, Quasi-Fixed Factor of Production, Short Run vs. Long Run, Technological Change, Technological Constraints, Variable Cost, Variable Factor of Production.

Recommended reading

University of Toronto: PPG-1002

Varian, Hal R., and Jack Repcheck. Intermediate microeconomics: a modern approach. Vol. 6. New York, NY: WW Norton & Company, 2010. Chapter 19 

Carleton Unversity: PADM-5111

Frank, Robert, Ian Parker, and Igela Alger. Microeconomics and Behaviour, 5th Canadian Edition. New York: McGraw-Hill, 2013. Chapters 9 and 10  

Harvard Kennedy School: API-101

Pindyck, Robert S. and Daniel L. Rubinfeld. Microeconomics, 8th Edition. Prentice-Hall, 2012. Chapters 6 and 7 (pp. 229-258)

NYU Wagner: GP-1018

Krugman, Paul and R. Wells, Microeconomics, 3rd edition. London: Worth Publishers, 2012. Chapters 9 (up to pg. 258), 11 (up to pg. 333), and 12

Ford School of Public Policy: Public Policy 555

Pindyck, Robert S., and D. Rubinfeld. Microeconomics, 7th edition. Upper Saddle River: Patience-Hall, 2007. Chapter 6

George Washington: PPPA-6003

Mankiw, N. Gregory. Principles of Microeconomics, 6th edition. Mason: South-Western College Publishers, 2011.  Chapters 13 and 14

Wheelan, Charles. Naked Economics: Undressing the Dismal Science. New York: W. W. Norton & Company, 2010. Chapter 2

American: PAUD-630

Krugman, Paul and R. Wells, Microeconomics, 3rd edition. London: Worth Publishers, 2012. Chapter 9 and 11


Goolsbee, Austan, Steven Levitt, and Chad Syverson. Microeconomics. New York:  Worth Publishers, 2013. Chapter 6

Rutgers- Economics in Public Policy

Pindyck, Robert S., and D. Rubinfeld. Microeconomics, 7th edition.  Upper Saddle River: Patience-Hall, 2007. Chapters 7 and 8


Sample Assessment Questions:

1.) When microeconomists speak about the difference between the "short run" and the "long run" what specifically do they mean?

2.) What is economic rent? Why is this an important concept for public policy students to understand?

Page updated by Sean Goertzen and Ben Eisen on 16 April 2015.


 Useful Resources on the Portal Related to this Topic

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 Concepts used in this Topic

  Jensen's Theory of the Firm
  Demand Function Facing the Firm
  Profit Maximization
  Natural Monopoly
  Cost Minimization
  Technological Constraints
  Supply Curve
  Short Run Industry Supply
  Cost Minimization

 Reference collections relevant to this topic

  Theory of the Firm: Profit Maximization, Firm Supply, Industry Supply
  Theory of the Firm: Technology, Cost Minimization, Cost Curves

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School of Public Policy and Governance