Production and Business Organization
Before we can eat our daily bread, someone must bake it. Similarly, the economy’s ability to build cars, generate elecuici,¥, write computer programs, and deliver the multitude of goods and services that are in our gross domestic product depends upon our productive capacity. Productive capacity is determined by the size and quality of the labor force, by the quantity and quality of
the capital stock, by the nation’s technical knowledge along with the ability to use that knowledge, and by the nature of public and private institutions. Why are living standards high in North America?
Low in tropical Africa? For answers, we should look to how well the machine of production is running. Our goal is to understand how market forces determine the supply of goods and services. Over the next three chapters we will lay out the essential concepts
of production, cost, and supply and show how they are linked. We first explore the fundamentals of production theory, showing how firms transform inputs into desirable outputs. Production theory also helps us understand why productivity and living standards have risen over time and how firms. manage their internal activities.
Building on our knowledge of production, Chapter 7 then develops the ea- . sential concepts of business cost. Businesses decide what inputs to employ in production on the basis of the costs and productivities of various inputs. Finally, we use the theory of production and cost to show how businesses decide how much output to produce. This is the basis for the supply curve we first saw in our basic analysis of supply and demand.
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