PRODUCTION AND SUPPLY

Modern price theory extended the concept of marginal utility to the supply side of the market by recognising that a profit maximising company will compare the cost of producing an additional unit of a product with the additional return from producing that unit. As long as the marginal return is higher than the marginal cost, total profit will increase by additional production. This will not result in the highest average profit per unit produced but in the highest total profit.

THE PRODUCTION FUNCTION

The production function refers to the physical relationship between a firm's inputs of productive services and its output of goods or consumer services. Firms can usually vary the proportions of resources combined to produce a good or service. For example, inputs can be substituted for one another (for example, labour and capital) and a firm can choose the combination of inputs it will use.

See economic factors