14.01SC | Fall 2011 | Undergraduate

Principles of Microeconomics

Unit 3: Producer Theory

Introduction to Producer Theory

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Session Overview

As we’ve already learned, consumers gain utility from buying goods—but every good has to come from somewhere! Goods are produced by firms, and analyzing the decisions of firms is also central to our understanding of the economy. In this lecture, we will learn how companies make important operation decisions.

When considering firm production decisions, we must consider the two forms of firm input – labor and capital. This image is a work of the US Federal Government and in the public domain. Source: Library of Congress.

Keywords: Production theory; firm production functions; variable inputs; fixed inputs; short run production; long run production; marginal rate of technical substitution; returns to scale.

Session Activities


Read the recitation notes, which cover new content that adds to and supplements the material covered in lecture.

Before watching the lecture video, read the course textbook for an introduction to the material covered in this session:

  • [R&T] Chapter 8, “Production and Cost.”
  • [Perloff] Chapter 6, “Firms and Production.” (optional)

Lecture Videos


Check Yourself

Concept Quiz

This concept quiz covers key vocabulary terms and also tests your intuitive understanding of the material covered in this session. Complete this quiz before moving on to the next session to make sure you understand the concepts required to solve the mathematical and graphical problems that are the basis of this course.

Question 1

What is the primary objective of firms?

Maximizing profit. check
Maximizing revenue. close
Maximizing utility. close
Minimizing costs. close
Check Show Solution

Costs and revenue are relevant to the firm's decision, but their primary objective is maximizing profit. Utility is maximized by consumers, not firms.

Question 2

What is the difference between the short-run and the long-run from the perspective of production theory?

In the short run, all inputs are invariable, and in the long run they are variable. close
In the short run, all inputs are variable, and in the long run they are invariable. close
In the short run, only capital varies, and in the long run both labor and capital vary. close
In the short run, only labor varies, and in the long run both labor and capital vary. check
Check Show Solution

In the short run, it is easy for a firm to adjust how many employees it has, but it cannot immediately build a new factory or install new equipment. In the long-run, both labor and capital can be changed.

Question 3

Which of the following is NOT a property of isoquants?

Always non-linear. check
Do not cross. close
Downward sloping. close
Further out is better. close
Check Show Solution

Isoquants can be linear when inputs are perfectly substitutable, and thus it is not the case that they are always non-linear.

Question 4

What is the term used to describe a production function in which you can double all inputs and output increases by more than double?

Constant returns to scale. close
Decreasing returns to scale. close
Increasing returns to scale. check
Leontief. close

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Course Info

As Taught In
Fall 2011
Learning Resource Types
Lecture Videos
Recitation Videos
Problem Sets with Solutions
Exams with Solutions
Lecture Notes
Exam Materials
Problem Sets