2. Technology
Firms maximize profits π = R(q, p) – C(q, r, w)
π is profit from producing q when prices are p, r, w
R is revenue from producing q when the output price is p
C is cost of producing q when input prices are r and w
q is the quantity produced
p is the price of output
r is rent, the price of capital (K), an input
w is wage, the price of Labor (L), the other input
3. Technology
Firms maximize profits π = R(q, p) – C(q, r, w)
The revenue function is easy: R = qp
The cost function is more complicated
What is the cheapest way to produce q if input prices are r
and w?
This depends on the firm’s technology – how they can
transform inputs into outputs
