In this article, a production-theory-based model of firms' markup behavior is constructed. The theoretical structure is based on variants of generalized Leontief cost and expenditure functions. This framework yields a specification of behavior from which the impacts of both supply and demand shocks on firms' markup behavior can be assessed through elasticities. Adjustment costs on both labor and capital and economies of scale are incorporated. Estimation is carried out using manufacturing data for the United States and Japan from 1960 through 1981. The empirical results suggest that markups for manufacturing firms in both the United States and Japan have increased over time but have somewhat different cyclical characteristics stemming primarily from differential investment behavior. In addition, capacity utilization and especially returns to scale tend to counteract the short-run profit potential from markup behavior so that markups measured assuming constant returns are typically biased downward. Finally, both supply and demand shocks appear to have significant systematic impacts on markups.