CHAPTER 2
PRODUCTION AND THE THEORY OF THE FIRM
2.1 INTRODUCTION
We will use the word production or productivity in a very general sense to denote all activities that satisfy consumer demand for goods and services. In the classic use of the term, production is associated with the use of natural resource inputs to produce finished products that are subsequently marketed to consumers through various service efforts. In the initial part of this book, we will be concerned with this classic interpretation. In the later part, we will also consider production of inherently information and knowledge intensive products, such as software. Production is therefore one of the basic components of microeconomic theory. A (classic) firm is a unit that uses natural resource inputs, capital, and labor to produce output goods or services for purchase by consumers. The economic problem faced by a production unit or a firm is that of determining the quantity of output to produce and the amounts of the various input factors to be used in the production process. This will depend, of course, on technological relationships between the prices or costs of input factors, or input supplies, and the price that can be obtained for the output quantity, which is a function of the demand for the product of the firm. This is a problem in resource allocation that involves
1. the technology of the production process or the production function,
2. the price, or equivalently costs, of the input resource quantities ...
