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Unformatted text preview: Lecture 15: Pro&t Maximization c & 2008 Je/rey A. Miron Outline 1. Introduction 2. The Firm and the Technology 3. Pro&ts 4. Short-Run Pro&t Maximization 5. Long-Run Pro&t Maximization 1 Introduction We have so far de&ned and discussed the technology that is available for producing goods and services. In words, the technology is a set of rules or formulas for combining inputs to generate outputs. We can describe the technology formally in a production function, and we can characterize this production function in terms of returns to scale, isoquants, marginal products, rates of technical substitution, and so on. The next question is what happens with this technology: how do we model the process by which this technology actually gets used to produce and sell output? It is useful to think brie¡y about a number of issues usually left in the background. 1. We assume that this technology exists in a legal environment that has well- de&ned property rights and contract enforcement. This might seem obvious, but the assumption is potentially problematic in some situtations (e.g., during a war) and regarding certain types of production (e.g., intellectual property like knowledge or ideas or artistic expression). 1 So, although it is usually taken as given, it is useful to remember that we are assuming people can own things and be secure in their ownership. For example, they can enter into contracts and trust that these contracts will usually be carried out or enforced. Naturally this does not always happen, and it is important to model the situations where deviations occur. We put that aside here, however. 2. We also assume the existence of &rms, that is, of legal entities that buy or rent inputs, using them along with the technology to produce output and sell it in markets. This might seem natural, but it is useful to note several things. Some economies have few entities, if any, that look like what we would consider &rms. Nevertheless, many of these economies have plenty of production. Think about hunter-gatherer societies. Or, think about various types of household pro- duction such as cleaning your room, cooking dinner, painting the garage, and so on. All these activities are economic production ¡they use inputs to generate output ¡ but no &rms are involved. Firms are not ¢primitives£ in the same way as consumers; they are legal con- structions. Many varieties exist in any given economy and across di/erent societies. So the assumption that production is carried out by &rms whose owners have well de&ned objectives is reasonable, but in certain contexts these assumptions are not necessarily right or at least raise interesting issues. 3. The third thing to note is that we take the boundaries of a &rm as given for most of the discussion....
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- Fall '09
- Economics, rental rate, VARIAN, A. Miron