chapter 4Production and Cost

In the previous chapter, we covered the demand half of the model of demand and supply; now we turn to the supply half. As we saw in Chapter 3, demand is a result of a buyer’s objective of maximizing utility. Similarly, supply is the result of a seller’s objective of maximizing profit. Before we discuss things like the law of supply and supply curves, it’s important to present the processes that go into supplying goods—production and cost. This leads us into the idea of profit maximization—if a seller knows what price a good will sell at, there is some quantity that will give the seller the highest amount of profit at that price (in fact, there is even a handy rule for knowing what that quantity will be).


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