Lectures on Neoclassical Production Economics

Lectures on Neoclassical Production Economics is an advanced undergraduate treatment of the fundamental economic model of producer behaviour. It shows how producers, confronted with existing technical possibilities and markets, decide how and what to produce. The book first discusses the roles that models, abstraction, and mathematics play in economic analyses. It then introduces a “canonical model” of “The Technology” as a set of inputs and output that satisfies five basic assumptions. Successive chapters build on this foundation to develop representations of technical possibilities that include production functions, input-requirement functions, input sets, and output sets. A “primer” on the optimal behaviour of price-taking, profit maximizing producers follows. It describes in a rigorous, but accessible, form the optimal producer behaviour using verbal, graphical, and mathematical arguments. Following chapters cover cost functions, revenue functions, and profit functions. These chapters treat the theories of cost-minimizing, revenue-maximizing, and profit-maximizing producers. Concepts covered include cost-minimizing demands, revenue-maximizing supplies, profit maximizing input demands and supplies, Shephard's Lemma, McFadden's Lemma, and Hotelling's Lemma. A chapter on duality then shows that the existence of well-behaved profit function implies the existence of a canonical technology. Distance function representations of input set and output sets are then introduced and their properties are derived. The book discusses: how to use distance functions to derive cost and revenue functions, how to use cost and revenue functions to construct “dual distance functions”, the role that distance functions play in calculating shadow prices, the use of distance functions to measure efficiency, and the use of distance functions to measure relative performance. The final chapter examines the consequences of relaxing the assumptions of the “canonical model” and price-taking producers.