Chapter 7: Innovation and Technological Change: The Future Is Now

Chapter 6 Production Magic: Pulling a Rabbit Out of the Hat

In This Chapter

▶ Understanding variable and fixed inputs, and their relationship to time ▶ Defining the relationship between inputs and output ▶ Producing with one variable input ▶ Minimizing costs with multiple inputs ▶ Considering returns to scale

Economics contains a lot of surprising and therefore magical conclusions. For example, you can increase your firm’s revenues sometimes by lowering price and thus selling a lot more or other times by raising price if you sell only a few less. (See Chapter 4 on elasticity.) Similarly, in production, sometimes you’re better off using a lot of machines, what economists call capital, to produce your good, and other times you’re better off using more labor.

The amount you use of an input depends upon how much it costs and how much output it adds. The crucial thing to determine is what input combination minimizes the cost of producing a given quantity of output. And minimizing cost is mandatory if you want to maximize profits. Maximizing profits — now that’s magical.