ABSTRACT
We have now covered a substantial part of the underlying structure for a simple aggregate model of an economy with production. The specific elements of the “microeconomic foundations” of this aggregate model developed so far have dealt with the optimizing behavior of individuals (“representative” firms and households) in a setting in which individuals take prices as given. Implicit in these discussions is another part of the microeconomic foundations, the way in which individual markets operate. We have been assuming that prices adjust so that the presumption that buyers and sellers are price-takers is justified. In other words, equilibrium within individual markets entails price adjustment to equate supplies and demands. In addition, we will assume that all individuals in the economy correctly foresee period t's output prices when input supply and production decisions are made at the start of the period. As discussed below, however, there are other options.
