Why Do We Assume That a Firm Will Try to Produce Its Output by Using the Lowest Cost Combination of Inputs Possible? Does This Reason Also Hold for Production Carried Out by Gimpa Business School? the Korle-Bu Teaching Hospital?

The nature of firm costs will have an important bearing on decisions regarding whether to consolidate, expand capacity, cut back production and ultimately whether to shut down. To decide on the optimal combination of factor input to employ in a given production decision, both the technical efficiency of the inputs and their relative input prices must be taken into consideration.

The choice of inputs that yield minimal costs for the firm will in general depend on the input prices and the level of output that the firm wants to produce

Every profit maximizing firm is faced with the task of either

• Minimizing cost at a given level of output

• Maximizing output at a given level of cost

If the marginal unit of output is less than the addition to revenue resulting from producing and selling that unit, then it will pay for the firm to continue expanding production. Most firms face a downwards sloping demand curve for their product; hence increasing sales is associated with a lower price.

Any desired level of output can normally be produced by a number of different combinations of inputs. The firm faces the task of determining the optimal combination of inputs o achieve the desired level of output. This involves the firm paying attention to the relative input prices in order to either minimize cost of producing a given output or maximizing output for a given level of cost. This involves adjusting the quantity of factor

Inputs employed until the marginal rate of technical substitution equals the ratio of the input prices. If the factor inputs are capital and labor then:

MRTS L for k MPK \MPL k \PL

Fiq 1

The optimal combination of inputs in the production process takes place when the ratio of the marginal products of the factor inputs is equal to the ratio of the input prices.

A firm is said to be technically efficient when the inputs of the factors of production are combined in the firm in the best possible way to produce the maximum...