Production Costs and the Theory of Supply

Abstract

At the beginning of Chap. 11 it was noted that the utility-based theory of demand is not really a theory that tells us much about consumer choice; its real function is to disentangle the assumptions necessary to support the first condition of the Market Welfare Model, that the demand curve represents the marginal benefits to society. The situation on the supply side is a bit different, however. While the main function of the analysis of production costs is to do for the supply curve what utility theory does for the demand curve, the cost theory we will look at in this chapter is a genuinely useful tool for studying issues of technology and the organization of production.