Knowledge that Transforms

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One of the problems which has plagued microeconomic theory is the difficulty in achieving close correspondence between formal models and practical market situations. The most widely accepted models envisage the firm set in a static mold with the implication that profits will be maximized in every period. The model is more generally acceptable in the case of perfect competition, for then the market results are most likely to be “as if” the firms acted marginally to maximize profits. Only the profit maximizers will survive. While such a scheme may lead to realistic results in the case of perfect competition, this condition does not bulk large in the United States economy.

Laurence Jay Mauer, Commercial Bank Maturity Demand for United States Government Securities and the Determinants of the Term Structure of Interest Rates, The Journal of Financial and Quantitative Analysis, Vol. 4, No. 1 (Mar., 1969), pp. 37-52