Lecture 3 Producer Behavior in the Competitive Market Introduction

In this lecture we will see a simple model which attempts to understand producer behavior in the competitive market. We define a producer as an entity of a production technology which transforms inputs into outputs.

Producer InputsOutputs Construction Company Woods, Concrete, Drill, etc…

Abstraction We use a function to describe the production technology, which is called the production function. In the real world, most of time, there are many inputs. But in our course, we only consider the cases where there is a single input and there are two inputs. Y=F(X) Where Y is the quantity of output and X is the quantity of input.

Production Function - example Hours per dayScore … … 80 Student Hours of Study Score in Final

Hours of Study per day Score in Final

Two Behavioral Hypotheses Cost minimization Profit maximization

Some Criticism -1 Some people think that profit maximization is not the proper objective for firms. They suggest that firms actually try to maximize the value of their equity holdings.

Some Criticism -2 A firm is a complex system which consists of many people. And the behavior of a firm is highly influenced by several different parties. For example, the owners of company might not engage with the management of the company directly. They may be able to set up the long-run strategy for the company, but the operation and enforcement of the strategy will be carried out by another group of people. Of course, it is true that the owners of the company might be trying to maximize the profit but the people who actually run the company only care about their own earnings. Therefore, is it sensible to think a firm as a single person who tries to maximize something ? …..