Teaching Market Conditions and the Efficiency of Firm Behavior at the Principles Level: An Alternative Approach

J. Lon Carlson
    The traditional approach to analyzing firm behavior at the principles level focuses on differences among the four basic market structures. I describe an alternative approach that examines how the price elasticity of demand limits the profit-maximizing firm's ability to mark up price over marginal cost. Limiting the analysis to the implications for price-taking versus price-searching firms simplifies the problem for students. More importantly, it enables them to more easily focus on how differences in the environments in which firms operate affect the efficiency of firm behavior and the potential for firms to earn economic profits in the short run and over time.