This chapter focuses on how firms operate. We begin defining what is the short and long run for a firm’s production process; in the short run the firm has at least one fixed input of production, whereas in the long run all inputs can be adjusted if the firm wishes to. Second, we analyse the relationship between a firm’s inputs and its outputs – that is, its production function – and how this relationship can change over time. We then examine how a firm’s output is related to its costs in the short run and in the long run. Finally, we consider how a firm’s profit is calculated.