Chapter 11

Chapter 11 - Chapter 11 One Input and One Output: A...

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Unformatted text preview: Chapter 11 One Input and One Output: A Short-Run Producer Model In our exposition of the consumer choice model, we have developed a particular lens through which we can view the actions of economic agents: individuals, whether as consumers, workers or financial planners, attempt to do the best they can given their economic circumstances . 1 Put into the more mathematical language of the B parts of our chapters, we can equivalently say that individuals optimize subject to constraints . We will now turn this same lens away from the consumer choice model and toward producers — the economic agents who combine “inputs” like labor, raw materials and land to produce “outputs” — goods and services that we consume in the marketplace. As in our development of the consumer model, we will for now maintain the assumption that every economic agent — including producers — is “small” relative to the market and thus lacks the power to influence prices in the economy. In the language we developed in Chapter 1, we will therefore begin our exploration of producers as economic agents in a “non-strategic” environment — an environment where their actions have no impact on the larger economy and where they, just as consumers, are “price takers.” Only after we have fully explored the implications of optimizing behavior in such a non-strategic environment will we turn in later chapters to considerations that enter our models when an economic agent is sufficiently powerful to have an impact on prices in an economy through her actions. In some ways, the models of competitive producers and consumers are not all that different – both producers and consumers make choices that are under their control in an attempt to do the best they can given their economic circumstances (that they cannot control). Producers will in fact be a bit more transparent than consumers, because – while consumers might have all sorts of tastes that we can’t really observe easily, producers, at least as we model them, are pretty shallow: they simply care about profit. But in other ways, we will find that the producer model is more complicated. For this reason, we will start in this chapter with a simply case – a producer who uses a single input to produce a single output. This will permit us to illustrate the idea of profit maximization in two different ways: First, we will show directly how producers maximize profits by choosing the production plan that puts them on their highest “indifference curve”, and second, we 1 No material from prior chapters is directly used in this chapter. However, the chapter contains frequent analogies to the consumer model and thus to material covered in chapter 2 and chapters 4 through 6. It is therefore highly recommended that material in those chapters be covered prior to Chapter 11. 332 Chapter 11. One Input and One Output: A Short-Run Producer Model will show that we can split the profit maximization problem into two steps (that will then form the...
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This note was uploaded on 05/13/2010 for the course ECON 105D taught by Professor Cur during the Fall '09 term at Duke.

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Chapter 11 - Chapter 11 One Input and One Output: A...

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