Chapter 12 - Chapter 12 Production with Multiple Inputs In...

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Chapter 12 Production with Multiple Inputs In Chapter 11, we developed some of the basic building blocks of the competitive producer model but we limited ourselves to the case of a single input being used to produce a single output. 1 From the outset, we did not hide the fact that such simple production processes rarely exist in the world, except perhaps in the short run where producers can vary only one of their inputs. But restricting ourselves to such short-run settings allowed us to depict the building blocks of the producer model. We did this in two-dimensional graphs of production plans, with producer choice sets forming the technological constraint faced by producers, and with isoprofit curves depicting their “tastes” for profit. We also demonstrated an alternative “indirect” approach to profit maximization – one in which producers first investigate the cost side of their operations before bringing revenues into the analysis. We will now focus on how we can extend the model to multiple inputs. This will allow us to ask not just how much a competitive firm will produce at different prices, but also what mix of inputs it will employ. In the short run model of Chapter 11, we did not have to think about such questions – because, so long as firms did not waste inputs, there was only a single way to produce a given output level. But when the firm is using multiple inputs like workers and machines, there are typically many different ways of combining these inputs (without wasting any) to produce a particular output level. I can buy a fancy robot to print up my economist cards and fire all my workers, or I can get rid of all the printing presses and have lots of workers stamp the images on the cards by hand, or I can find some in between solution that uses some machines and some workers. Once we know how to model production processes with such multiple inputs, we can think of how an economist might advise me to choose between these options – or, in my case, how I will advise myself as I hold one of my imaginary discussions between me and myself. 2 We will find out quickly that the direct “profit maximization” method first employed in Chapter 11 becomes graphically cumbersome – and in fact, you may skip straight to Section 12A.2 if you already believe me on this point after looking at the daunting Graph 12.1. It is in part for this reason that we will quickly move on to developing the “indirect” approach to profit maximization 1 Chapter 11 is required reading for this chapter. No material from chapters prior to Chapter 11 is directly used in this chapter. However, as Chapter 11, this chapter contains frequent analogies to the consumer model and particularly to material covered in Chapter 2, as well as Chapters 4 through 6. The final part of the B section also draws analogies to Chapter 10.
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