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Econ211 Lectures: Chapter 7: Production & Costs
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 Lesson 7.1: What is Production? A. Firm and Production: a. Firm: An organization that comes into being when a person or a group of people decides to produce a good or service to meet a perceived demand. b. All firms demand inputs, engage in production, and produce output. They also have an ...

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  • January 16, 2025
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  • 2024/2025
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1/7/25, 4:13 AM Econ211 Chapter 7 Lecture




Econ211 Lectures:

Chapter 7: Production & Costs


 Lesson 7.1: What is Production?

A. Firm and Production:
a. Firm: An organization that comes into being when a person or a group of
people decides to produce a good or service to meet a perceived demand.
b. All firms demand inputs, engage in production, and produce output. They also
have an incentive to maximize profits and minimize costs.
c. Production: the process by which inputs are combined, transformed, and
turned into outputs. If the firm is successful, the outputs are more valuable
than the inputs.
d. Production involves a number of important decisions that define that behavior
of firms. These decisions include, but are limited to:
i. What product or products should the firm produce?
ii. How should the products be produced
iii. How much output should the firm produce?
iv. What price should the firm charge for its products?
v. How much labor should the firm employ?
B. Market structure:
a. Market structure can help firms answer questions regarding their production.
The answers also depend on the structure of the market for the product(s) in
question.




b. Market structure is a multidimensional concept that involves how competitive
an industry is. It is defined by questions such as these:
i. How much market power does each firm in the industry possess?
ii. How similar is each firm’s product to the products of the other firms in
the industry?
iii. How difficult is it for new firms to enter the industry?
iv. Do firms compete on the basis of price, advertising or other product
difference?




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, 1/7/25, 4:13 AM Econ211 Chapter 7 Lecture




C. The Factors of Production:
a. Natural resources: land and raw materials.
b. Labor(L): human effort, both physical and mental.
c. Capital(K): physical capital, the machines, equipment, and buildings that one
uses to produce the product.
d. Technology(t): the process of processes for producing the product.
e. Entrepreneurship(E): production involves many decisions and knowledge
involved in production.
D. The Production Function:
a. Production function: a mathematical expression or equation that explains the
relationship between a firm’s inputs and its outputs:
Q = f[NR, L, K, t, E]

b. By plugging in the amount of labor, capital and other inputs the firm is using,
the production function tells how much output will be produced by those
inputs.
c. Different products have different production functions. The amount of labor a
farmer uses to produce a bushel of corn is likely different than that required to
produce an automobile.
d. Firms in the same industry may have somewhat different production functions,
since each firm may produce a little differently.
e. Economists often use the short-hand form of the production function:
Q = f[L, K]
We can describe inputs either fixed or variable.
E. Fixed Inputs:
a. Fixed inputs are those that can’t easily be increased or decreased in a short
period of time.
b. They define the firm’s maximum output capacity.
c. They do NOT change as output changes.
Example:
If one owns a pizza restaurant, the building is a fixed input.

Once the entrepreneur signs the lease, he or she is stuck in the building until
the lease expires.
F. Variable Inputs:
a. Variable inputs are those that can easily be increased or decreased in a short
period of time.
b. They increase or decrease as output changes.
Example:
In a pizzeria, the pizzaiolo can order more ingredients with a phone call, so
ingredients would be variable inputs.

The owner could hire a new person to work the counter pretty quickly as well.




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