A. THEORY OF PRODUCTION AND MARGINAL PRODUCTS

BASIC CONCEPTS

A modem economy has an enormously varied Set of productive activities. A farm takes fertilizer, seed, land, and labor and turns them into wheat or com. Modem factories take inputs such as energy, raw materials, computerized machinery, and labor and use them to produce tractors, lVs, or tubes of toothpaste.

An airline takes airplanes, fuel, labor, ‘and computerized reservation systems and provides passengers with the ability LO travel quickly through its network of routes. An accounting firm takes pencils, computers, paper, office space, and labor and produces audits or tax returns for its clients. Our discussion assumes that the farm, factory, airline. and accounting firm stem to produce efficiently, that is, at lowest cost. In other words; they always attempt to produce the maximum level of output for a given dose of inputs, avoiding waste’whenever possible. Later on, in deciding what goods or services to produce and sell, firms are assumed to
maximize economic profits as well.

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