THEORY OF THE FIRM I : MICRO-ECONOMICS THEORY III

A firm is a decision making unit/entity which through process of production converts inputs into outputs. The producer is assumed to be motivated by the objective of maximizing profits where: Profit= Gross revenue-Expenditure   TR TC TR  PQ Where P is the output price and Q is the output Other objectives of the firm include:  Revenue maximization  Cost minimization  Market share maximization It is assumed that the objective of a firm is to maximize profits but subject to: (i) Technological constraints, that is, the relationship between inputs and outputs. This relationship shows all the conceivable combinations of inputs where output is assumed to be continuously divisible. (ii) Market constraints. This is concerned with the effects of actions of other agents on the firm. However, the firms are assumed to be competitive, that is, price takers in both inputs and outputs. Therefore the focus will be on technological constraints