ABSTRACT
In an economic boom, firms experience increased demand for their products. Do they respond by raising prices, by producing more, or by some combination of the two? In this chapter, we answer this question with a simple model of the firm. In this model, as long as wages remain constant the firm will respond by producing more output without changing its price. Understanding this response is crucial for the subsequent chapters, which develop complete macroeconomic models resting on this micro economic foundation.
