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Linking The Substitution And Output Effects Of Production To Profit Maximization In The Intermediate Microeconomics Course

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  • Jeffrey Wolcowitz

Abstract

In a recent article, Thaver (2013) makes the case for including in intermediate microeconomics textbooks analysis of the substitution and output effects of a firm’s response to a change in the price of an input. In her analysis, Thaver assumes that the firm is constrained by a fixed budget for inputs, making the firm’s substitution and output effects analytically identical to the consumer’s substitution and income effects. Intermediate microeconomics textbooks typically do not assume a fixed budget for inputs when describing a firm’s profit-maximizing behavior. This paper removes the assumption of a fixed budget for inputs and provides a non-calculus presentation of substitution and output effects suitable for the intermediate course. Without this assumption, the substitution and output effects of the change in the price of an input must work in the same direction regardless of whether an input is normal or inferior, and the firm’s input demand curve, unlike a consumer’s demand curve for a good, must slope downward.

Suggested Citation

  • Jeffrey Wolcowitz, 2014. "Linking The Substitution And Output Effects Of Production To Profit Maximization In The Intermediate Microeconomics Course," Business Education and Accreditation, The Institute for Business and Finance Research, vol. 6(1), pages 13-22.
    • Handle: RePEc:ibf:beaccr:v:6:y:2014:i:1:p:13-22
    as

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    File URL: http://www.theibfr2.com/RePEc/ibf/beaccr/bea-v6n1-2014/BEA-V6N1-2014-2.pdf
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    References listed on IDEAS

    as
    1. Ranjini L. Thaver, 2013. "Integrating The Output And Substitution Effects Of Production Into The Intermediate Microeconomics Textbook," Business Education and Accreditation, The Institute for Business and Finance Research, vol. 5(1), pages 81-90.
    2. D. V. T. Bear, 1965. "Inferior Inputs and the Theory of the Firm," Journal of Political Economy, University of Chicago Press, vol. 73(3), pages 287-287.
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    More about this item

    Keywords

    Substitution Effect; Output Effect; Isoquants; Consumer Theory; Production Theory; Input Demand;
    All these keywords.

    JEL classification:

    • A22 - General Economics and Teaching - - Economic Education and Teaching of Economics - - - Undergraduate
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity

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