Why Economics Textbooks Must Stop Teaching the Standard Theory of the Firm

Abstract

The accepted theory of the firm abounds with fallacies, starting with one that has been known to be false since 1957 - the horizontal demand curve for the individual competitive firm. When these fallacies are corrected, nothing of substance remains. Equating marginal revenue & marginal cost does not maximize profits, competition does not lead to price equaling marginal cost, and the welfare loss previously attributed to monopoly is due instead to profit maximizing behavior, independent of the number of firms in an industry. Economic education about the behavior of firms should be based on empirical research, present a range of competing theories as explanations of this behavior, and teach the Marshallian model as a stage in the development of economic thought.

Keywords: Microeconomics, competition, monopoly, perfect competition, oligopoly, profit maximization, Industrial Organization, Economics education

JEL Classification: A20, C71, D20, D21, D41, D42, D43, D46, D50, D60