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Producer Theory: Costs
The basic theory of the firm regards the firm as a mechanism for transforming productive inputs into final and intermediate goods and services. This process is known as production. For instance, the smelting of copper or gold removes impurities and makes the resulting product into a more valuable substance. Silicon Valley transforms silicon, along with a thousand other chemicals and metals, into computer chips used in everything from computers to toasters. Cooking transforms raw ingredients into food, by adding flavor and killing bacteria. Moving materials to locations where they have higher value is a form of production. Moving stone to a building site to construct an exterior wall, bringing the King Tut museum exhibit to Chicago, or qualifying a basketball team for the league playoffs are all examples of different types of production. According to this simple view, a firm is comprised of a technology or set of technologies for transforming materials into valuable goods and to maximize profits. This “production function” view of the firm is appropriate for some environments, when products and services are standardized and technologies are widely available. However, in other settings, this way of thinking about the firm is misleading, especially when the internal organization of the firm is important. Nevertheless, the “production function” model of the firm is a natural starting point to begin our investigation of competition.
