Chapter 5 provides the basic theory of production and costs. We cover short-run and long-run production functions, in general, and introduce various measures of input productivity such as; average products, marginal products, value of marginal products. This is followed by an examination of how managers' select the profit-maximizing input usage. We move from the discussion of a general production function to three specific functional forms: linear productions, fixed-proportions production functions, and Cobb-Douglas production functions.

The introduction to production functions is followed by isoquant-isocost analysis, which provides a set of rules to determine long-run equilibrium input combinations that minimize costs. This portion of the chapter provides a bridge between production and costs.

The chapter closes with a discussion and graphical presentation of the cost function. The relationship between the single-output per-unit short-run costs is thoroughly described. We compare and contrast the isoquant-isocost and cost analysis to show that they are two ways to look at the same question. Then, a discussion of multiple-output cost functions is introduced.