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The Behavior of
Chapter Outline
Profit-Maximizing Firms
The Behavior of Profit-
Maximizing Firms
Profits and Economic Costs
Short-Run versus Long-Run
Decisions
The Bases of Decisions: Market
Price of Outputs, Available
Technology, and Input Prices
Choice of Technology
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 2 of 33
THE PRODUCTION PROCESS: THE BEHAVIOR
OF PROFIT-MAXIMIZING FIRMS
CHAPTER 7: The Production Process: The Behavior
of Profit-Maximizing Firms
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 3 of 33
THE PRODUCTION PROCESS: THE BEHAVIOR
OF PROFIT-MAXIMIZING FIRMS
CHAPTER 7: The Production Process: The Behavior
of Profit-Maximizing Firms
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 4 of 33
THE PRODUCTION PROCESS: THE BEHAVIOR
OF PROFIT-MAXIMIZING FIRMS
CHAPTER 7: The Production Process: The Behavior
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 5 of 33
THE PRODUCTION PROCESS: THE BEHAVIOR
OF PROFIT-MAXIMIZING FIRMS
CHAPTER 7: The Production Process: The Behavior
Perfect Competition
of Profit-Maximizing Firms
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 6 of 33
THE PRODUCTION PROCESS: THE BEHAVIOR
OF PROFIT-MAXIMIZING FIRMS
CHAPTER 7: The Production Process: The Behavior
of Profit-Maximizing Firms
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 7 of 33
THE BEHAVIOR OF PROFIT-MAXIMIZING FIRMS
CHAPTER 7: The Production Process: The Behavior
of Profit-Maximizing Firms
1. 2. 3.
How much Which production How much of
output to technology each input to
supply to use demand
FIGURE 7.3 The Three Decisions That All Firms Must Make
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 8 of 33
THE BEHAVIOR OF PROFIT-MAXIMIZING FIRMS
CHAPTER 7: The Production Process: The Behavior
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 9 of 33
THE BEHAVIOR OF PROFIT-MAXIMIZING FIRMS
CHAPTER 7: The Production Process: The Behavior
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 10 of 33
THE BEHAVIOR OF PROFIT-MAXIMIZING FIRMS
CHAPTER 7: The Production Process: The Behavior
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 11 of 33
THE BEHAVIOR OF PROFIT-MAXIMIZING FIRMS
CHAPTER 7: The Production Process: The Behavior
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 12 of 33
THE BEHAVIOR OF PROFIT-MAXIMIZING FIRMS
CHAPTER 7: The Production Process: The Behavior
Total revenue
Total cost with optimal method
= Total profit
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 15 of 33
THE PRODUCTION PROCESS
CHAPTER 7: The Production Process: The Behavior
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 16 of 33
THE PRODUCTION PROCESS
CHAPTER 7: The Production Process: The Behavior
of Profit-Maximizing Firms
0 0
1 10 10 10.0
2 25 15 12.5
3 35 10 11.7
4 40 5 10.0
5 42 2 8.4
6 42 0 7.0
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 17 of 33
THE PRODUCTION PROCESS
CHAPTER 7: The Production Process: The Behavior
of Profit-Maximizing Firms
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 18 of 33
THE PRODUCTION PROCESS
CHAPTER 7: The Production Process: The Behavior
Returns
Diminishing returns always apply in the short run, and in the short run every firm will face
diminishing returns. This means that every firm finds it progressively more difficult to
increase its output as it approaches capacity production.
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 19 of 33
THE PRODUCTION PROCESS
CHAPTER 7: The Production Process: The Behavior
total product
average product of labor
total units of labor
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 20 of 33
THE PRODUCTION PROCESS
CHAPTER 7: The Production Process: The Behavior
of Profit-Maximizing Firms
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 21 of 33
THE PRODUCTION PROCESS
CHAPTER 7: The Production Process: The Behavior
FACTORS OF PRODUCTION
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 22 of 33
CHOICE OF TECHNOLOGY
CHAPTER 7: The Production Process: The Behavior
of Profit-Maximizing Firms
A 2 10
B 3 6
C 4 4
D 6 3
E 10 2
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 23 of 33
CHOICE OF TECHNOLOGY
CHAPTER 7: The Production Process: The Behavior
of Profit-Maximizing Firms
A 2 10 $12 $52
B 3 6 9 33
C 4 4 8 24
D 6 3 9 21
E 10 2 12 20
Two things determine the cost of production: (1) technologies that are available and (2)
input prices. Profit-maximizing firms will choose the technology that minimizes the cost of
production given current market input prices.
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 24 of 33
Appendix
CHAPTER 7: The Production Process: The Behavior
TABLE 7A.1 Alternative Combinations of Capital (K) and Labor (L) Required
to Produce 50, 100, and 150 Units of Output
QX = 50 QX = 100 QX = 150
K L K L K L
A 1 8 2 10 3 10
B 2 5 3 6 4 7
C 3 3 4 4 5 5
D 5 2 6 3 7 4
E 8 1 10 2 10 3
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 25 of 33
Appendix
CHAPTER 7: The Production Process: The Behavior
of Profit-Maximizing Firms
Isoquant A graph
that shows all the
combinations of
capital and labor
that can be used
to produce a given
amount of output.
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 26 of 33
Appendix
CHAPTER 7: The Production Process: The Behavior
Slope of isoquant:
of Profit-Maximizing Firms
K MPL
L MPK
marginal rate of
technical substitution
The rate at which a
firm can substitute
capital for labor and
hold output constant.
FIGURE 7A.2 The Slope of an Isoquant Is Equal
to the Ratio of MPL to MPK
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 27 of 33
Appendix
CHAPTER 7: The Production Process: The Behavior
FACTOR PRICES
AND INPUT
of Profit-Maximizing Firms
COMBINATIONS:
ISOCOSTS
isocost line A
graph that shows all
the combinations of
capital and labor
available for a given
total cost.
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 28 of 33
Appendix
CHAPTER 7: The Production Process: The Behavior
of Profit-Maximizing Firms
K TC / PK PL
L TC / PL PK
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 29 of 33
Appendix
CHAPTER 7: The Production Process: The Behavior
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 30 of 33
Appendix
CHAPTER 7: The Production Process: The Behavior
of Profit-Maximizing Firms
FIGURE 7A.6 Minimizing Cost of FIGURE 7A.7 A Cost Curve Shows the
Production for qX = 50, Minimum Cost of
qX = 100, and qX = 150 Producing Each Level of
Output
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 31 of 33
Appendix
CHAPTER 7: The Production Process: The Behavior
MPL PL
slope of isoquant slope of isocost
MPK PK
MPL PL
Thus,
MPK PK