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Chapter Outline
7
The Production Process: The Behavior of
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
The Production Process
Production Functions: Total Product, Marginal Product, and
Average Product Production Functions with Two
Variable Factors of Production
Choice of Technology Looking Ahead: Cost and Supply
Appendix: Isoquants and Isocosts
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FIGURE 7.1 Firm and Household
Decisions
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Although Chapters 7 through 12 describe the behavior of perfectly competitive firms, much of what we say in these
chapters also applies to firms that are not perfectly competitive. For example, when we turn to monopoly in
Chapter 13, we will be describing firms that are similar to competitive firms in many ways. All firms, whether
competitive or not, demand inputs, engage in production, and produce outputs. All firms have an incentive to
maximize profits and thus to minimize costs.
production The process by which inputs
are combined, transformed, and turned into outputs.
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Production Is Not Limited to Firms
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. Most firms exist to make a profit.
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