Economics } 007 } Producer Theory } 2 }

This lecture further discuss production theory in terms of profit maximization choosing labor. A detailed discussion on mathematical formulation of profit equation, complements, and substitutes is presented.

Entrepreneur tries to maximize profit, labor and capital are typical inputs to this economic model, delivery services are outputs and the production function’s role is to realize this model. Now there are many different variables to this economic model, what happen to profits when capital K is fixed and labor can be varied or vice-versa when labor is fixed and capital can be varied. Similar other questions can be answered after solving profit maximization economic model. How the firms behave when they try to do profit maximization? This lecture explains theory and how to approach such questions.

In simple sense an increase in capital will increase the demand for the labor when the labor and capital are complements, and it will decrease the demand for labor when labor and capital are substitutes.

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