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PRODUCER BEHAVIOUR
AND SUPPLY
7 1 6 1 1 1
INTRODUCTORY MICROECONOMICS 46
In Chapter 2 we studied the consumers
behaviour. In Chapters 3 and 4 we will be
concerned with the producers behaviour. In
this chapter in particular, we study important
concepts associated with production and
costs.
A producer or a firm is in business to
maximise profit.
1
By definition, profit earned
by a firm is equal to its total revenues minus
the total costs. As an example, suppose that
you are in the business of making hammers,
and, during a month, you produce and sell
500 hammers. They are selling at the price of
Rs. 20 each. Then the total revenues
generated are equal to price
quantity, that
is, Rs. 20 500 = Rs. 10,000.
Producing hammers requires inputs such
as labour, building, equipment and raw
materials. This is a technological relationship.
In turn, inputs have to be paid. The sum total
of payments to all inputs is the total cost of
production. Let the total cost of making 500
hammers over the month be Rs. 6,500.
Then your profit is equal to Rs. 10,000
Rs. 6,500 = Rs. 3,500.
1
In this chapter and others, we will use the term profit
or profits. Both are correct uses.
PRODUCTION AND COSTS
CHAPTER 3
3.1 Production
3.2 Costs