Economic theory is founded on the assumption that agents act as if they are able to maximize according to well-behaved preferences, regardless of how complex their decision problems might be. Consequently, the theory has never investigated the consequences of a genuine gap between an agent's decision-making competence and the difficulty of a decision problem (called a C-D gap). In a recent paper (1983; hereafter called the paper), I outlined a general theory for investigating the latter possibility. A major theme was that recurrent pattern in behavior arises because of decision-making uncertainty due to a C-D gap; so that uncertainty becomes the basic source of predictable behavior. Here I discuss certain theory topics that were only sketched in the Origin paper, and briefly suggest a few related applications. To pursue these objectives, I begin with a short restatement of the reliability condition introduced in the Origin paper.

In two important studies, Charles Plott (1982) and Vernon Smith (1982) assess the current state of the literature about laboratory experiments in economics. As a profession, we are becoming aware that experimental methods can be applied to our models, with cautious but growing confidence that these procedures can help us evaluate alternative theories. These are significant developments whose potential ramifications are only beginning to be explored. Given the importance of laboratory testing, I would like to discuss a key feature of past experiments, one that has not been fully appreciated because of its central role in standard economic theory. In particular, these experiments depend on inducing agents to respond according to a prespecified value structure. This usually amounts to starting with a known and fully determinate set of demand and supply value schedules for all transacting agents. Smith, for example, specifies four major principles about how preferences are to be experimentally induced (nonsatiation, saliency, dominance, and privacy; see pp. 931-35).

A number of economists have studied the input behavior (Eugene Silberberg 1974a; Lowell Bassett and Thomas Borcherding 1 970a, b, c; C. E. Ferguson and Thomas Saving, and Paul Meyer, 1967) of a competitive industry in which entry or exit continues until industry output price moves to the minimum average cost of the marginal firm in the industry. However, this analysis requires very strong assumptions which severely restrict diversity between firms. Silberberg (1974a), for example, assumes all firms' production functions are identical except for a scale factor. Complementary to these long-run investigations, I will present a compact but thorough analysis of the short-run case in which technology and the number of firms are fixed, but industry output-price responds to aggregate supply changes of existing firms resulting from changes in factor prices. In contrast to the long-run analysis, no assumptions limiting interfirm diversity, nor any other restrictions (beyond definition of the usual neoclassical firm) are needed. Furthermore, results are obtained for industry factor demand which do not necessarily hold for individual firms when they respond to factor prices jointly with other firms in the industry. This contradicts the older methodology associated with Paul Samuelson (1947) in which factor-demand responses are derived for firms acting in isolation from each other, and their isolated responses are aggregated to obtain the industry factor response. For example, traditional theory shows input response obeys the law of demand for isolated firms. But this standard result no longer holds when a firm adjusts within a larger industry of firms whose collective output response can affect output price. Thus, the law of demand for industry factor behavior cannot be established by aggregation of isolated firm responses. However, its validity does nevertheless hold in the short run in which the number of firms in the industry is constant. Therefore, the purpose of this paper is to characterize the short-run industry level factor-demand implications, and to show how these implications relate to the traditional theory of isolated firm behavior. In addition, it is briefly shown how these short-run results also imply that the law of demand is likely to hold even in the long run, where entry and exit from the industry can occur (even for an industry of quite dissimilar firms). Given the well-established literature of the standard neoclassical firm, the main body of the paper will confine presentation to required definitions, and the statement plus interpretation of the main results. All proofs and derivations are reserved for the Appendix.