141_Chapter_7_Lecture_Outline - 7 The Production Process...

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7 The Behavior of Profit Maximizing Firms The Production Process: OUTLINE OF TEXT MATERIAL I. Introduction A. The Behavior of Firms 1. Firms purchase inputs and sell outputs. 2. Although the analysis refers to the behavior of perfectly competitive firms,  much of what is said also refers to firms that are not competitive. B. Production Is Central 1. Production  is the process by which inputs are combined, transformed, and  turned into outputs. C. Assumptions: 1. Production Is Not Limited to Firms a. Households also engage in transforming factors of production into  useful things. b. Some government agencies also produce goods and/or services.  For example, the Department of Motor Vehicles produces drivers’  licenses and vehicle license plates. c. firm  is an organization that comes into being when a person or  group of people decide to produce a good or service to meet a  perceived demand. Most firms exist to make a profit. 2. Perfect Competition a. Perfect competition  exists in an industry when there are many small  firms producing identical (homogeneous) products. 75
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72     Principles of Microeconomics b. Homogeneous products  are products that are indistinguishable from  one another. c. Such   firms   are   price   takers   because   they   must   adhere   to   the  market price. Each firm is so small it has no control over the price  it charges. d. Firms can enter and exit the industry at low cost. Opportunities for  economic profit will be quickly eliminated through entry of new  firms. e. A firm in a perfectly competitive market faces a demand curve it  believes is horizontal (perfectly elastic). II. The Behavior of Profit-Maximizing Firms A. Three Decisions Every Firm Must Make 1. How much output to produce (quantity supplied). 2. How to produce that output (which technology to use). a. Changing production technology changes the relationship between  input and output quantities. b. technological improvement  allows a firm to produce more output  with the same quantities of inputs. 3.
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141_Chapter_7_Lecture_Outline - 7 The Production Process...

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