Economics, 11th Edition

CHAPTER 12Production and the Costs of Production

CHAPTER OBJECTIVES

• Explore some production basics: categories for productive activity, production methods, and technology and creative destruction.
• Differentiate between the time frames in which production occurs and identify various types of costs.
• Identify the types of costs associated with the short-run and explain their behavior patterns.
• Identify long-run costs and their behavior patterns.
• Provide a more detailed understanding of short-run average costs.

We engage in many productive activities. Students produce papers and projects; families wash cars and clothes and make meals; businesses produce computers, office buildings, and financial advice; and governments provide police and fire protection. Production is a process: It involves taking resources, like labor and materials, and using them to make goods and services.

This chapter is concerned with the microeconomic aspects of production. While all of the areas of the economy engage in production, the vast majority of measured production is done by businesses. So, while many of the concepts in this chapter can be applied to other areas, the focus is on goods and services produced by business firms and their costs of production.

There is an important connection between a firm's production, its costs of production, and its objective to maximize profit. Remember from the previous chapters that profit is what remains after costs are subtracted from revenue. All other ...