Summary

The major theme of the previous reading selections was that to make a profit, a business must successfully deal with three constraints or boundaries: the demand curve for output, the production function, and supply curves for inputs. The table below shows how these concepts are related to the functions of the business and to the marginal concepts that are central in microeconomics.

The Constraints Facing the Firm
Task:
Economic
Concept
Limitation
Imposed by
Relationship
between
Marginal
Concept
buying
inputs
supply of
resources
resource
owners
price (money)
and amount
of resource
marginal
resource
cost
producing
output
production
function
technology
inputs and
output
marginal
product
selling
output
demand
curve
customers
output and
price (money)
marginal
revenue

The importance of these three constraints can be seen in a product that no firm can produce at a profit. Any one of three changes, if large enough, can change the situation and make a profit possible. The cost of the inputs may drop in price enough so that the product is profitable. Or technology may improve enough to make the product profitable. Or people may increase the amount they are willing to pay for the product enough so that it is profitable. These three changes are changes in the supply-of-resources curves, the production function, and the demand curve, respectively.

We are not done with the theory of the firm, but only just begun.


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Copyright Robert Schenk