This chapter presents, in more rigorous form than in Chap. 3, standard producer theory and uses it to explain the notion of Marshallian short- and long-period partial equilibrium of a product market. It cautions about the dangers of netputs; it distinguishes three meanings of returns to scale; it illustrates activity-analysis isoquants; it studies cost minimization and profit maximization via the Kuhn–Tucker approach; it explains the profit function, the Weak Axiom of Profit Maximization, the Weak Axiom of Cost Minimization, Shephard’s Lemma for firms, Hotelling’s Lemma; it discusses inferior inputs and rival inputs; it illustrates the notion of quasi-rent; it explains the role of free entry for the notions of price taking and perfect competition. The Pareto efficiency of competitive partial equilibrium is proved. Then, after a criticism of the frequent assumption of a given number of firms, the equations of the non-capitalistic general equilibrium of production and exchange (without joint production) are presented, and it is shown that this equilibrium can be interpreted as an equilibrium of exchange: of indirect exchange of factor services. Demand is shown to influence relative product prices through its influence on income distribution. Some doubts are raised on whether preferences are as persistent and reversible as the approach would need them to be. The online Appendix to the chapter adds further observations on the influence of demand on product prices and develops formulae for the factor demand conditional elasticities used in applied research. The present chapter introduces to the neoclassical theory of competitive firms so as to arrive at the general equilibrium of production and exchange, still without capital goods. It will familiarize you with: a more rigorous treatment of the notions introduced in earlier chapters of production function, isoquant, returns to scale, cost minimization, elasticity of substitution; the study of profit maximization via the Kuhn–Tucker approach; the notions, central in standard producer theory, of WAPM, WACm, Shephard’s Lemma and Hotelling’s Lemma; the curious effects of inferior inputs and rival inputs; the Marshallian approach to short-period and long-period partial equilibrium; the relevance of free entry for the notions of price taking and perfect competition; the system of equations of the non-capitalistic general equilibrium with production and its reducibility to an equilibrium of exchange (of factor services).
