Teacher resources and professional development across the curriculum

Teacher professional development and classroom resources across the curriculum

# Economics USA: 21st Century Edition

## Unit 2 — The Firm

### Purpose:

To explain the concept of the production function, and to describe how firms can minimize their costs of production by utilizing an optimal combination of inputs and scale of operation.

### Objectives:

1. The relationship between the rate of output of a commodity and the rate at which inputs are used is called the production function.

1. An “input” is a factor, such as labor, machinery, or land, that contributes to production.
2. A production function “embodies” a given technology; a change in technology changes the relationship between inputs and output.
3. If a percentage increase in all inputs results in an increase in output greater than the percentage increase in inputs, the production process has economies of scale.
2. Some inputs can be changed more easily than others in response to a change in demand. Those inputs (such as labor, raw materials, or energy) are called variable inputs, and inputs which can only change in the long run (such as a factory) are called fixed inputs.
3. If the successive additions to output lessen as more and more of an input is added (while technology and the quantity of other inputs are held constant), the input is subject to diminishing marginal returns.
4. To minimize its costs, a firm must choose a combination of inputs to meet the following condition: the marginal product of a dollar’s worth of any one input must equal the marginal product of a dollar’s worth of any other input used.

## Meet the Series Experts

GO >>

### Michael Aslett

Partner/Publisher at PrintPOD Inc., using the Internet and print-on-demand distribution to further the development of desktop publishing.

See full bio

### Raymond Burnett, Jr.

Retired Studebaker executive and a member of the Board of Trustees of the Studebaker National Museum.

See full bio

### Jackie Flamm

Partner/Publisher at PrintPOD, Inc., developing products for worldwide delivery over the Internet and in print.

See full bio

## Study Tools

### Calculator

Use this web-based calculator to aid in your studies.

1. Which of the following statements is MOST accurate: The bulk of the nation’s productive capacity is controlled by...

 just a few hundred of our largest firms. proprietorships. the nation’s four million agricultural firms. businesses in wholesale and retail trade.

just a few hundred of our largest firms.

NEXT QUESTION
2. The assumption that firms generally attempt to maximize profits is...

 wholly accurate, even though business managers won’t admit it. pretty much true, though it’s an oversimplification. true of large corporations, but often untrue about smaller firms. often false in real life.

pretty much true, though it’s an oversimplification.

NEXT QUESTION
3. In economic terms, current technology sets limits on the...

 total possible production achievable in a given time period. number of inputs that can be used for a given product. number of firms that can compete in one market. ratio of fixed inputs to variable inputs.

total possible production achievable in a given time period.

NEXT QUESTION
4. Studebaker Automobiles manufactured three styles of passenger cars and two models of trucks. During a given month in the life of Studebaker, which of the following would MOST LIKELY be classified as a fixed input?

 labor paint tooling equipment the two models of trucks

This would be the input most difficult to change over a short period of time. The last option is a product, not an input.

NEXT QUESTION
5. Whether an input is considered variable or fixed depends MAINLY on...

 its cost. its relative contribution to total production. the length of time under consideration. the nature of the firm using the input.

the length of time under consideration.

NEXT QUESTION
6. If the marginal product of a man-year of labor is 50 units of output, and the price of labor is \$2,500 per man-year, then the marginal product of a dollar’s worth of labor is...

 \$50. \$500. 2 units of output. .02 units of output.

.02 units of output.

RESTART QUIZ

GO >>