The theory of the firm is one of the cardinal elements of economics because of the variety of uses it serves throughout the whole of economic analysis. Nothing could be more short-sighted than to dismiss it as an isolated, slightly esoteric area of micro-economics with very little practical application, as theory for theory’s sake. On the contrary, knowledge of the way in which firms behave is essential in almost every field of economics because firms are decisively involved in the determination of such major variables as investment, prices, employment, output and wages. From the applied macro-economist trying to solve the problem of inflation, to the most abstract of growth theorists devising optimum growth paths over a time-horizon of infinity, almost everybody involved in economics will be using some results derived from the theory of the firm when constructing their models.
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