A microeconomic model of business growth, decay and cycles

Abstract

This paper presents a dynamic theory of price, output, working capital and interest for the firm and industry. It yields many of the standard properties of the firm and industry at equilibrium, and in addition, a new microeconomic theory of growth, decay and business cycles. This is achieved by adding a working capital or budget constraint to the conventional atomistic single product firm and assuming a one period input-output lag. The theory leads to a simple but instructive example of a new mathematical system called recursive programming that represents ex ante optimizing while at the same time exhibiting ex post nonoptimality under certain conditions.