David K.H. Begg, Gianluigi Vernasca-Economics-McGraw Hill Higher Education (2011)

Learning Outcomes
By the end of this chapter, you should understand:
0 a production function
f) technology and a technique of production
0 how the choice of technique depends on input prices
G total, average and marginal cost, in the long run and short run
0 returns to scale, and their relation to average cost curves
0 fixed and variable factors in the short run
0 the law of diminishing returns
0 how a firm chooses output, in the long run and short run
Chapter 6 introduced the theory of supply. Firms choose the output at which marginal cost equals marginal
revenue. This maximizes profits (or minimizes losses). If profits are positive, the firm produces this output.
If profits are negative, it checks whether losses are reduced by shutting down. This chapter develops the
theory of supply in more detail. In particular, we want to understand how the firm can produce the output
that maximizes profits (or minimizes losses). To do that, we need to better understand what the production
activity of a firm is.
We distinguish between the short-run and the long-run output decisions of firms. No firm stays in business
if it expects to make losses for ever. We show how and why cost curves differ in the short run, when the
firm cannot fully react to changes in conditions, and the long run in which the firm can fully adjust to
changes in demand or cost conditions.
Figure 7 .1 summarizes the material of this chapter. The new material is all on the cost side. Because there
are so many cost curves, you may find it useful to check back to Figure 6.1. We start by introducing the
production function, which describes the firm's technology.
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