From production to profit: an extended lab report: from a simple experiment in production

Jonathan Willner
    One of the many difficulties in teaching economics is convincing students that short‐run production and cost measurements are tightly and inexorably linked and that they matter to profitability. From a discussion of production and costs we usually move right on to profit maximization at the margin in a perfectly competitive environment. An intermediate step would focus on how elasticity and cost measurements influence profits. Most introductory texts discuss the links between production and costs as well as the relationship between elasticity of demand and total revenue. Students often come away from the experience without connecting these essential concepts. Using an experiment designed by Ted Bergstrom and John Miller, I develop a lab report that leads the student through short‐run productivity measurements and relationships (from Bergstrom & Miller, 1997), cost measurement and relationships, the links between production and cost measurements and finally how production and cost targeting may influence profits in the absence of direct knowledge of revenues. This last set of connections depends simply on demand elasticity as opposed to market structure and its plethora of assumptions.

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