Producer Theory

Since Marshall, the standard approach to developing a theory of competitive markets is to separate demand behavior (“consumer theory”) from supply behavior (“producer theory”) and then use the notion of market equilibrium to reconcile demand and supply. This note studies producer theory and a separate one studies consumer theory. The standard model has the following features. Firms are described by fixed and exogenously given technologies that allow them to convert inputs (in simple models, these are land, labor, capital and raw materials) into outputs (products). “Competitive” producers take both input and output prices as given, and choose a production plan (a technologically feasible set of inputs and outputs) to maximize profits. Before we get into the details, let’s remark on a few key features of the model.