A business takes inputs, which it pays for, and transforms them into outputs, which it gets paid for, and must make a profit in the process. As anyone who has ever run a lemonade stand knows, to make a profit you must sell the output for more than you paid for the inputs. Profit is what remains after the cost of the inputs—land, labor, plant, equipment, raw materials, transportation, and so on—is subtracted from the revenue received for the output. (Actually, taxes must also be subtracted.)
How does a business manage its costs? How does a business find the right mix among the factors of production? Let’s find out.