theory of the firm

  

Definition

Behavior of a firm in pursuit of profit maximization, analyzed in terms of (1) what are its inputs, (2) what production techniques are employed, (3) what is the quantity produced, and (4) what prices it charges. The theory suggest that firms generate goods to a point where marginal cost equals marginal revenue, and use factors of production to the point where their marginal revenue product is equal to the costs incurred in employing the factors.

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