Introduction

Production is the transformation of inputs into outputs. The production process typically takes place within firms. They buy or hire various inputs and combine them, using available technology, to produce various outputs of goods and services. Then they sell the outputs they produce. For example, a firm that makes video games hires different kinds of labor (game experts, programmers, salespeople, accountants, lawyers, and so on) and buys or rents various capital goods (office space, computer equipment, Internet access, furniture, and so on) to make and market games. A farm, whose land and machinery are more or less fixed in the short term, employs labor to produce corn. In the farm example, it is plausible to think of the production process as one that uses one input to produce one output.

In this chapter, we develop a simple production model with just one input and one output; we call it the single-input/single-output model. At the end of the chapter we briefly describe a model with a single input and multiple outputs – most firms in reality have many outputs – and we will provide techniques for solving its profit maximization problem. Later, in the next chapter, we will move on to the case of the production of a single output with multiple inputs, the multiple-input/single-output model.

Focusing on the simple single-input/single-output model is definitely not the usual textbook approach. Most books on microeconomics start with a two input/ one-output model, the kind that we will cover in our next chapter.