Competition and Growth

The economic theory of market competition involves two stages of decision making. One is at the firm level, where each firm chooses its output optimally by maximizing profits. This yields the rule: price equals marginal cost. The second stage involves the optimal number of firms in the total industry or market, where total supply must satisfy total demand. The first stage is internal to the firm, whereas the second stage is internal to the industry. At the equilibrium price each active firm maximizes its profits and the market clears in the sense that all demand is satisfied.