Firm’s Analysis

Abstract

At first glance, firm’s theory looks less abstract than consumer theory, because generally its scope is to study an extremum problem in which the function to be maximized is profit, an easily definable and measurable quantity, at least conceptually. But, while consumer’s theory can safely be developed assuming all prices as exogenously determined, firm’s theory can do with given prices only under one type of market form, namely, perfect competition. Under other plausible market forms, such as monopolistic competition, oligopoly, and monopoly, prices cannot be treated as given, and this can make the analysis quite difficult, so that, to analyse oligopoly, it is practically compulsory to resort to game theory.