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Economics U$A: 21st Century Edition
The Firm (Microeconomics)
In 1980, renowned soda company Coca-Cola replaced sugar with high-fructose corn extract in order to lower production costs. In 1963, Studebaker closed its plant, unable to increase sales and take advantage of economies of scale. In the 21st century, printing and publishing company PrintPOD, Inc. avoided increasing domestic labor expenses by tapping into the workforce in India. These stories show how competitive firms try to minimize their costs of production by utilizing an optimal combination of inputs and scale of operation.
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Unit Overview
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:
- The relationship between the rate of output of a commodity and the rate at which inputs are used is called the production function.
An “input” is a factor, such as labor, machinery, or land, that contributes to production.- A production function “embodies” a given technology; a change in technology changes the relationship between inputs and output.
- 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.
- 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.
- 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.
- 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
Raymond Burnett, Jr.
Retired Studebaker executive and a member of the Board of Trustees of the Studebaker National Museum. Born in 1928, he remembers that his grandfather, father, and brother all worked at Studebaker, and that he worked up through the ranks as a laborer and then salaried personnel, rising to National Sales Manager of the Studebaker Corporation. His recollections express the pride in workmanship of “a family working together” and capture the pathos and grief of the company’s workers as Studebaker failed and closed its doors.
Jackie Flamm
Partner/Publisher at PrintPOD, Inc., which develops products for worldwide delivery over the Internet and in print. Formerly, she taught English as a Second Language at the American Language Institute in Washington, D.C.; was Director of English Language Learning at Euroschools of Italy; and was ESL Editorial Director at Regent’s Publishing International and at the American Book Company. She also served as a Language Consultant to Children’s Television Workshop, helping to create “Sesame English” for markets in Japan and China. She is the author of The English Advantage. Ms. Flamm received her B.A. from Syracuse University.
Michael Aslett
Partner/Publisher at PrintPOD Inc., which uses the Internet and print-on-demand distribution to further the development of desktop publishing. Formerly, he was Development Director at the Daily Mirror in London and a partner in Colour Workshop, producing illustrated book content in color. With Kodak, he developed pre-press production methods, which allowed national daily newspapers to print in color. Mr. Aslett is a graduate of the London School of Printing.
Glossary
- average product of an input
Total output divided by the amount of input used to produce this amount of output. - average product of labor
Total output per unit of labor. - cost minimization
Pursuit of incurring the fewest expenses during the manufacturing process. - fixed input
A resource used in the production process (such as plant and equipment) whose quantity cannot be changed during the particular period under consideration. - law of diminishing marginal returns
The principle that if equal increments of a given input are added (the quantities of other inputs being held constant), the resulting increments of product obtained from the extra unit of input (the marginal product) will begin to decrease beyond some point. - marginal product of an input
The addition to total output that results from the addition of an extra unit of input (the quantities of all other inputs being held constant). - marginal product of labor
The additional output resulting from the addition of an extra unit of labor. - production function
The relationship between the quantities of various inputs used per period of time and the maximum quantity of output that can be produced per period of time; that is, the most output that existing technology permits the firm to produce from various quantities of inputs. - specialization
The usage of economic resources for specific tasks; “resources” can refer to materials or labor. - technological change
New methods of producing existing products, new designs that make it possible to produce new products, and new techniques of organization, marketing, and management. - variable input
A resource used in the production process (such as labor or raw material) whose quantity can be changed during the particular period under consideration.
