ABSTRACT
In an economic boom, firms experience increased demand for their products. In a simple macroeconomic model, all the firms are assumed to be identical. In this model, as long as wages remain constant the firm responds by producing more output without changing its price. Under perfect competition, firms are price takers because they are too small to control prices in the face of vigorous competition. With firms setting prices by adding on a mark-up to their marginal cost, and with constant marginal cost, the firm's managers have a straightforward task in determining the appropriate level of production. The marginal product of labor is constant, which means it is equal to the average product of labor, and both are made to equal one by the choice of labor units. The aggregate production function shows that the secret to increasing employment lies in increasing the level of production.
