6.1 : Assumptions on Producer Behavior

Production

Production involves the creation of products. For example, a consumer electronic company may manufacture mobile phones, pharmaceutical companies manufacture drugs, and a clothing manufacturer may produce t-shirts.

Assumptions

To simplify the analysis of a firm's production behavior, certain assumptions are made. These assumptions allow economists to create models that can predict and explain firm behavior. While they may not always reflect reality perfectly, they provide a useful framework for understanding key economic concepts. A few common assumptions are:

1. The firm is assumed to produce only one product. In reality, a consumer electronics firm may produce smartphones, tablets, computers, laptops, televisions, home theatre systems, wearable devices, cameras, audio devices, and smart home appliances. During analysis, it is assumed that it produces only one product, such as laptops.
2. It is assumed that the firm's goal is to minimize the cost of production of this one product.
3. The firm uses only two inputs, labor, and capital, for production. An electronics company actually utilizes various inputs such as the skilled labor of engineers and designers, unskilled labor of cleaning and security staff, manufacturing equipment, testing apparatus, raw materials like silicon and metals, and other items. For analysis, it is assumed that the firm uses only two inputs: labor and capital.
4. The prices of the inputs, i.e., labor and capital, are assumed to be given.
5. It is assumed that the firm's output exhibits diminishing returns to labor and capital. This means that as more of one input is added (while holding the other constant), the additional output produced by each extra unit of input eventually decreases.