In this chapter we see why firms make the production choices they and how their costs affect their choices We will apply the marginal decision rule to the production process and see how this rule ensures that production is carried out at the lowest cost possible We examine the nature of production and costs in order to gain a better understanding of supply We thus shift our focus tofirms, organizations that produce goods and services In producing goods and services, firms combine the factors of production—labor, capital, and natural resources—to produce various products Economists assume that firms engage in production in order to earn a profit and that they seek to make this profit as large as possible That is, economists assume that firms apply the marginal decision rule as they seek to maximize their profits Whether we consider the operator of a shoe-shine stand at an airport or the firm that produces airplanes, we will find there are basic relationships between the use of factors of production and output levels, and between output levels and costs, that apply to all production The production choices of firms and their associated costs are at the foundation of supply 8.1 Production Choices and Costs: The Short Run LEARNING OBJECTIVES Understand the terms associated with the short-run production function—total product, average product, and marginal product—and explain and illustrate how they are related to each other Attributed to Libby Rittenberg and Timothy Tregarthen Saylor URL: http://www.saylor.org/books/ Saylor.org 412