What’s in This Chapter?

This unit describes typical production behavior of businesses, and explains the difference between short-run and long-run production behavior. Businesses use different types of resources to produce their products. These resources include variable resources and fixed resources. Some businesses use primarily variable resources, and others rely on a large amount of fixed resources.

When we know something about a firm’s production behavior, we can derive its cost functions. The relationship between production data and costs is discussed. This provides the foundation for a detailed description of cost functions in the next unit (Unit 5).

The last two sections of Unit 4 discuss factor prices, the determination of wage and interest rates, and the concept of present value.