Theory of Production, Cost and Behaviour of the Firm: A Comprehensive Reformulation

Abstract

Once we have analysed the consumer equilibrium, we shall put forward the points concerning production, for which a similar method to that employed in chapter 1 will be used. In the first section, a brief introduction to the firm’s conventional theory will be presented. In the second section, we shall study the production possibility set and the existence of production function. In the next section, we shall present the properties of the production function. Then, we shall pose firstly the most genuine profit maximisation problem subject to a technological restriction, to follow with the same problem fixing the costs, that is, the income maximisation problem subject to a level of cost. A particular case of this problem is obtaining a specific level of production, which makes possible the output maximisation subject to a budget constraint on the acquisition of the inputs so that the firm changes only the suitable level of output. We shall pose the loss minimisation problem which is similar to as the profit maximisation problem and which will be presented next fixing the income, that is, the cost minimisation problem subject to a level of income. Finally, we shall study an especially interesting case of this problem, which is that of cost minimisation subject to a level of output; in this case, the firm will change only the level of cost. In the six cases a perfect competition in the input and output markets is assumed, which means that output prices and demand depend on output market conditions, while input prices -rather than the amount-depend on input market conditions.