ABSTRACT
In a general equilibrium approach to economic analysis, the economy is characterized as being in equilibrium and the economic activities that facilitate a transition from one equilibrium state to another, or that keep the economyon an equilibrium trajectory in a dynamic setting, are of secondary importance. Taking a lesson from the methodological issues discussed in Chapter 2, this might be justified as assuming away features of the real world that are irrelevant to the issues the models wish to depict, to focus on issues the user of the model wishes to analyze. To take the analogy from the previous chapter, if one wants to understand how the bicycle rider remains upright on two wheels, one can ignore the path that the bicycle is taking from one location to another because it is irrelevant to understanding how the bicycle rider balances on two wheels. One cannot hope, however, to come to a deeper understanding about the path over which the bicycle travels by studying ever more intensely how a bicycle is able to stabilize itself on two wheels. This chapter examines the role of firms in an economy to gain some insight as to how they influence the path through which the economy travels.
