Chapter 6.1: Firms and Their Production Decisions

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.