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Theory of the Firm
describes how a firm makes cost-minimizing production decisions and how the firm’s resulting cost varies with its output.
Production Technology
an electronics firm might produce 10,000 televisions per month by using a substantial amount of labor (e.g., workers assembling the televisions by hand) and very little capital, or by building a highly automated capital-intensive factory and using very little labor.
Cost Constraints
Firms must take into account the prices of labor, capital, and other inputs. Just as a consumer is constrained by a limited budget, the firm will be concerned about its cost of production.
Input Choices
Given its production technology and the prices of labor, capital, and other inputs, the firm must choose how much of each input to use in producing its output.
The Concept of a Firm
run by managers separate from the firm’s owners, and who hire and manage a large number of workers
Factors of Production
inputs into the production process (labor, capital, and materials)
Production Function
Function showing the highest output that a firm can produce for every specified combination of inputs.
flows
Inputs and outputs are ___
Technically feasible; efficiently
Production function describes what is ____ when the firm operates ____
Period of time in which quantities of one or more production factors cannot be changed.
Short run
Production factor that cannot be varied
Fixed input
Amount of time needed to make all production inputs variable
Long run
Intensity
In the short run, forms vary the ___ with which they utilize a given plant and machinery.
Size
In the long run, firms vary the ___ size of the plant
Short run; long run
All fixed inputs in the ___ represent the outcomes of previous ___ decisions based on estimates of what a firm could profitably produce and sell.
