behave. What does that mean? Let’s define what we mean by the firm. A firm (or producer or business)

combines inputs of labor, capital, land, and raw or finished component materials to produce outputs. If the

firm is successful, the outputs are more valuable than the inputs. This activity of production goes beyond

manufacturing (i.e., making things). It includes any process or service that creates value, including

transportation, distribution, wholesale and retail sales.

Production involves a number of important decisions that define a firm's behavior. These decisions include,

but are not limited to:

• What product or products should the firm produce?

• How should the firm produce the products (i.e., what production process should the firm use)?

• How much output should the firm produce?

• What price should the firm charge for its products?

• How much labor should the firm employ?
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