The Representation of Production

“Tastes” and “technology” are the fundamentals upon which neoclassical general equilibrium models are built. While the representation of tastes is expressed through utility and demand functions, the underlying productive technology of the economy is represented by production functions that relate various quantities of various inputs to the output produced by firms. This approach requires a behavioral theory that describes the activity of firms as they carry out the processes of production. The behavioral theory is profit maximization, which parallels the utility maximization of consumers on the demand side of the economy. While some of the conceptual and mathematical difficulties that plague the representation of preferences are common to the treatment of production in the models, there are several important differences.