Introduction

In most of the last chapter we modeled a firm with one input and one output. However, assuming one input is unrealistic; most goods and services are produced by firms with a variety of different inputs. The production of something as simple as corn really requires land, labor, trucks, tractors, combines, fertilizer, pesticides, possibly irrigation, and so on. Moreover, the single-input model fails to capture a basic economic problem. Normally there are many ways to combine inputs to produce a desired level of the output; some of the ways are expensive and some are cheap. How does the firm combine various inputs to produce a given level of output at the least cost? In this chapter, we assume there are two or more inputs that the firm combines in some way to produce its output. We analyze how the firm decides how much output to produce, and how much of each input to use, to minimize its costs and maximize its profits. That is, we will now develop the multiple-input/single-output model.

As we indicated in the introduction to the last chapter, it is possible to learn about the most important results in the theory of the firm by studying either the single-input/single-output model or the multiple-input/single-output model. (The only important topic that the single-input/single-output model cannot handle is cost minimization.) This book differs somewhat from the typical textbook on microeconomics because it gives the reader the choice between these two models.