Cambridge International as and a level Economics Ebook

b
What do you notice about the shape of the two 
and what does this indicate?
c
What production implications do these concepts 
have for a clothing fi rm planning how much to 
produce?
The firm’s costs of production
Although we have already referred to the 
fi rm
, we 
have not as yet defi ned it. Th
e term ‘a fi rm’ is used by 
economists to describe a unit of decision making which 
has particular objectives such as 
profi t maximisation
, 
the avoidance of risk-taking and achieving its own 
long-term growth. At its lowest level the fi rm may 
be a sole trader with a small factory, a hawker’s food 
stall or a local shop. Th
e term is also used for national 
or multinational corporations with many plants and 
business establishments such as Nestlé, Sony, Tata and 
Toyota. In economic theory, all fi rms are headed by an 
entrepreneur (see 
Chapter 1
).
Firm: 
any business that hires factors of production in order 
to produce goods and services.
Profit maximisation: 
the assumed objective of a firm 
where the diff erence between total revenue and total cost is 
at a maximum.
KEY TERMS
300
200
1
2
3
4
5
6
100
Number of workers
0
Output of clothing
Production function
Figure 7.6 
A production function
151
Chapter 7: The price system and the microeconomy 

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A fi rm and its entrepreneur must consider all the costs of the 
factors of production involved in the fi nal output. Th
ese are 
the private costs directly incurred by the owners. Production 
may create costs for other people but these are not necessarily 
taken into account by the fi rm (see 
Chapter 6
). Th
e fi rm is 
simply the economic organisation that transforms factor 
inputs such as raw materials with capital equipment and 
labour to produce goods and services for the market.