Microeconomics For Dummies, USA Edition
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A firm with a given technology makes a choice about how much of each of the factors of production to use to make how much output — and pays the cost for doing so. The question for the firm is how to use its technology and choose its inputs in order to make its profits as large as possible.

The way it does so is to choose its inputs in order to make the costs as small as possible.

An example of how an economist looks at a technology.
An example of how an economist looks at a technology.

The technology shown in the figure is a specific form known as a Cobb-Douglas production function.

If you're wondering why economists think this way, consider profit maximization. In the following equation, profit equals the difference between total revenue and total cost:

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A firm can determine what to make and how much to make, but it doesn't have any control over what consumers choose to buy. Therefore, it makes sense that economists model the things that the firm does control — its own costs — and so they assume that profit maximization is the same thing as cost minimization.

About This Article

This article is from the book:

About the book authors:

Lynne Pepall, PhD, is a professor of economics at Tufts University. She has taught microeconomics at both graduate and undergraduate levels since 1987.

Peter Antonioni is a senior teaching fellow at the Department of Management Science and Innovation, University College, London, and coauthor of Economics For Dummies, 2nd UK Edition.

Manzur Rashid, PhD, is a lecturer at New College of the Humanities, where he covers second-year micro- and macroeconomics.

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