Demand, Technology, and the Theory of the Firm

Abstract

One of our goals is to understand the forces that influence firm behavior. The principal constraints derive from consumers (demand), nature (technology), and competitors. Demand derives from consumers who strive to maximize their utility or satisfaction within their budget and other constraints. When tastes are under the full control of consumers, firms take market demand as given. That is, demand is exogenously determined. This is the basis of consumer sovereignty---consumer preferences determine what firms produce.