Chapter 6

Production Magic: Pulling a Rabbit Out of the Hat

In This Chapter

arrow Understanding variable and fixed inputs, and their relationship to time

arrow Defining the relationship between inputs and output

arrow Producing with one variable input

arrow Minimizing costs with multiple inputs

arrow Considering returns to scale

Economics contains a lot of surprising and therefore magical conclusions. For example, you can increase your firm’s revenues sometimes by lowering price and thus selling a lot more or other times by raising price if you sell only a few less. (See Chapter 4 on elasticity.) Similarly, in production, sometimes you’re better off using a lot of machines, what economists call capital, to produce your good, and other times you’re better off using more labor.

The amount you use of an input depends upon how much it costs and how much output it adds. The crucial thing to determine is what input combination minimizes the cost of producing a given quantity of output. And minimizing cost is mandatory ...

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