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Unformatted text preview: C H A P T E R 11 One Input and One Output: A Short-Run Producer Model In this chapter, we begin to look at the theory of the firm as a price taker. We do this in the simplest possible setting — where producers use a single input to produce a single output — because it is in this setting that we can develop the basics of profit maximization. As will become clearer in upcoming chapters, this one-input/one- output model can be thought of as a short run model of producer choice because we can think of inputs (other than the one input in the model) as being fixed in the short run. So, for instance, when we say “labor is the only input”, one interpretation of this statement is that it really means “labor is the only input that can be varied in the short run” because other inputs like factory size can only be changed in the long run. Chapter Highlights The main points of the chapter are: 1. A production plan specifies a bundle of inputs and outputs just as a con- sumption bundle in consumer theory represents a bundle of different goods. Just as consumers choose consumption bundles that maximize utility, pro- ducers choose production plans that maximize profit. Both try “to do the best they can given their circumstances,” but — unlike in the consumer case — what is “best” has a more concrete meaning because we can quantify profit as the difference between economic revenues and costs. 2. As a result, “indifference curves” for producers — or isoprofit curves — are not a matter of “tastes” but emerge from the fact that producers are indiffer- ent between production plans that result in the same level of profit. Since the profit of any production plan depends on the input and output prices, this implies that these producer “indifference curves” emerge from prices. This is unlike the consumer case where prices have nothing to do with indifference curves. 197 One Input and One Output: A Short-Run Producer Model 3. The fundamental constraint the producers face is a technological constraint that limits which production plans are in fact technologically feasible. Unlike the consumer case where constraints are shaped by prices, the technological constraint — modeled through the production frontier or the production function — has nothing to do with prices. 4. Any profit maximizing production plan (that involves positive production) has the characteristic that the marginal revenue productofthe intput equals the marginal cost of the input represented by the input’s price. From this in- sight we can derive both the (short run) output supply curve (or function) as well as the (short run) input demand curve (or function), each sloping in the expected direction because of the law of diminishing marginal product ....
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This note was uploaded on 02/13/2011 for the course ECON 100A taught by Professor Woroch during the Fall '08 term at Berkeley.
- Fall '08