ABSTRACT
Economic activities are of two general types: production activities and consumption activities. Production refers to the transformation of productive inputs into the output of a good or a service. Consumption refers to the process of using goods and services to create utility, which is defined as a general level of satisfaction. Firms purchase productive inputs and transform them into goods and services. Households purchase goods and services and transform them into utility. (The reason a good is called “good” is that you can increase your utility by consuming it.) In this chapter, we focus on production, with a particular emphasis on how inputs are transformed into goods and services. We also illustrate that the same logic that applies to the firm’s production choices can apply to a household’s consumption choices.
