13Lecture

13Lecture - LECTURE 13 Today is Tuesday, October 5, 2010....

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LECTURE 13 Today is Tuesday, October 5, 2010. The unemployment rate of the U.S. labor force is (still) 9.6%. During class, the price of gold hit a new record high of $1,340.40 per troy ounce. Last March in this class the price was $1,145 per troy ounce. THE THEORY OF THE FIRM We now begin the all-important topic in microeconomics known as the theory of the firm: how and why firms make economic decisions. Entrepreneurs organize firms to produce economic goods. The entrepreneurs develop a business plan to produce and sell economic goods. The entrepreneurs contract with households to obtain land, labor, and capital in exchange for income, which goes to the household as rent, wages, and interest, respectively. If the revenues of the firm exceed the costs of inputs during the period of production and sale, the firm makes a profit, which goes to the entrepreneur. The profit motive is the only reason that entrepreneurs organize and operate firms. Firms that make the best decisions make the most profit, and can operate for long periods of time. Firms that make bad decisions make little or no profit, or take losses, and go out of business. For centuries, economists have observed how firms make decisions, and how those decisions have resulted in profits and losses. Unlike other theories, such as evolution and global warming, the theory of the firm is settled science , and no economist disagrees with any of the principles that you are about to learn. PRODUCTION RUNS Remember, all production takes place in the firm. Inputs are combined to produce economic goods, or products. There are three production runs that define the production process for any economic good: the long run, the short run, and the market period . The Long Run Production runs are not definitive periods of time, such as 6 months or 1 year. Production runs will differ from firm to firm and from industry to industry. Production runs are defined by the number of inputs that can be altered during a given time period or at a given point in time when the entrepreneur considers making a change in the production process .
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BY DEFINITION: IN THE LONG RUN, ALL INPUTS ARE VARIABLE. NO INPUTS ARE FIXED. By variable, we mean that the quantities of the inputs used to produce output are variable. Sonny Hatley's cotton farm requires land, labor, and capital. If Sonny can alter the number of acres he plants in cotton, the number of workers he hires, and the amounts of all the capital that he uses, including tractors, seed, fertilizer, bug spray, and so on, then he is operating in the long run, as the quantities of all his inputs used are variable. If the firm can alter any of the inputs that the firm uses to produce goods and services, then, by definition, the firm is operating in the long run. The Short Run
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13Lecture - LECTURE 13 Today is Tuesday, October 5, 2010....

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