notes5 - Chapter 5 Producer Theory Markets have two sides:...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 5 Producer Theory Markets have two sides: consumers and producers. Up until now we have been studying the consumer side of the market. We now begin our study of the producer side of the market. The basic unit of activity on the production side of the market is the f rm. The task of the f rm is take commodities and turn them into other commodities. The objective of the f rm (in the neoclassical model) is to maximize pro f ts. That is, the f rm chooses the production plan from among all feasible plans that maximizes the pro f t earned on that plan. In the neoclassical (competitive) production model, the f rm is assumed to be one f rm among many others. Because of this (as in the consumer model), prices are exogenous in the neoclassical production model. Firms are unable to a f ect the prices of either their inputs or their outputs. Situations where the f rm is able to a f ect the price of its output will be studied later under the headings of monopoly and oligopoly. Our study of production will be divided into three parts: First, we will consider production from a purely technological point of view, characterizing the f rm’s set of feasible production plans in terms of its production set Y . Second, we will assume that the f rm produces a single output using multiple inputs, and we will study its pro f t maximization and cost minimization problems using a production function to characterize its production possibilities. Finally, we will consider a special class of production models, where the f rm’s production function exhibits constant returns to scale. 121
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Nolan Miller Notes on Microeconomic Theory: Chapter 5 ver: Aug. 2006 5.1 Production Sets Consider an economy with L commodities. The task of the f rm is to change inputs into outputs. For example, if there are three commodities, and the f rm uses 2 units of commodity one and 3 units of commodity two to produce 7 units of commodity three, we can write this production plan as y =( 2 , 3 , 7) , where, by convention, negative components mean that that commodity is an input and positive components mean that that commodity is an output. If the prices of the three commodities are p =(1 , 2 , 2) ,thena f rm that chooses this production plan earns pro f to f π = p · y , 2 , 2) · ( 2 , 3 , 7) = 6 . Usually, we will let y y 1 ,...,y L ) stand for a single production plan, and Y R L stand for the set of all feasible production plans. The shape of Y is going to be driven by the way in which di f erent inputs can be substituted for each other in the production process. A typical production set (for the case of two commodities) is shown in MWG Figure 5.B.1. The set of points below the curved line represents all feasible production plans. Notice that in this situation, either commodity 1 can be used to produce commodity 2 ( y 1 < 0 ,y 2 > 0 ), commodity 2 can be used to produce commodity 1 ( y 1 > 0 2 < 0 ), nothing can be done ( y 1 = y 2 =0 )o r both commodities can be used without producing an output, ( y 1 < 0 2 < 0 ). Of course, the last situation is wasteful — if it has the option of doing nothing, then no pro f
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 09/21/2011 for the course ECON 3022 taught by Professor Wer during the Spring '11 term at UC Irvine.

Page1 / 37

notes5 - Chapter 5 Producer Theory Markets have two sides:...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online