Question

How is production similar to consumer demand theory and how is it different?

Answer 1

The similarity lies in optimization.

In consumer theory, the consumer seeks to maximize utility subject to the budget constraint, which is the maximum amount the consumer can spend for buying two goods. Similarly, in production theory, the firm seeks to maximize profit (output) subject to the total cost, which is the maximum cost the firm can incur for buying two inputs.

However, unlike in consumer theory, production can be short run or long run. In short run, one of the inputs is kept fixed while the other varies. In long run, both inputs are variable and therefore, short run cost function is different from long run cost function.