Production and Costs

Contemporary production and cost theory mimics the logic of consumption theory, which should hardly be surprising because production is a derived aspect of utility seeking. The ideal version assumes that producers without external coercion and relying solely on reason (including complete mastery of quantitative methods) can figure out and will optimally supply consumers with the quantity and assortment of goods and services that maximize purchasers' utilities at least competitive factor cost. This requires them to competitively maximize profits with full knowledge of ideal technological possibilities, and cost functions (continuous, twice differentiable and monotonic), by producing to the point where marginal revenue equals marginal cost. The behavior is an implication of the Enlightenment notion that reason suffices for consumers to glimpse and achieve the ideal through the actions of the invisible hand and perfect government administration. If these assumptions are satisfied, then it is easily shown that utility-seeking individuals in their roles as consumers and producers in the private and public sectors will achieve the best outcomes not only in the present but also throughout their lifetimes…