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Unformatted text preview: Chapter 13 Production Decisions in the Short and Long Run So far, we have developed the basic tools for analyzing profit maximizing decisions by price-taking producers. We will now turn to an analysis of how changes in the economic or technological environment will affect the decisions by producers in the short and long run. 1 By the economic environment we will continue to mean the output and input prices that price-taking producers take as given as they try to do the best they can, and by the technological environment we will mean the technological processes that permit inputs to be converted to outputs as summarized by the production frontier. By short run we will mean the period over which some input is fixed while by long run we will mean the period when all inputs are variable. Since our treatment of the two-input model in Chapter 12 implicitly assumed that producers are free to set all input levels (labor and capital) to their cost minimizing quantities for all levels of output, we have thus far analyzed only the long run in our treatment of the two-input model. At the same time, we analyzed a single-input model in Chapter 11 and have argued several times that such a model can be interpreted as a short run model in which another input is held fixed. Put in terms of the language of production frontiers, such a short run one-input model is simply a two-dimensionalslice of the three-dimensional long run production frontier where one of the inputs is fixed. We will now proceed to integrating our treatments of short run one-input models derived from long run, two-input models by distinguishing short run from long run decisions under the assumption that capital is a fixed input in the short run while labor is always variable. Of course the analysis would not change in any fundamental way if we instead assumed labor was fixed in the short run and capital was variable. Producers who face changing economic or technological environments must then decide whether to produce at all before deciding how much to produce and what combination of inputs to employ. Since a producer has already committed to incur certain expenses (for the fixed input) in the short run, we will refer to a decision not to produce in the short run as a decision to shut down equivalent to hanging a shingle on the door of the factory saying temporarily closed. In the long run, however, a producer has the choice of getting out of all financial obligations associated with 1 This chapter contains some of the most challenging material in the text and instructors may wish to be selective about which part to use. Chapters 11 and 12 are necessary reading for this chapter. Analogies to substitution effects in the consumer model (chapter 7) also appear. 348 Chapter 13. Production Decisions in the Short and Long Run her business and simply vanish from the industry with no door left to hang a shingle. We will refer to this long run decision not to produce as a decision to...
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This note was uploaded on 04/07/2008 for the course ECON 55 taught by Professor Rothstein during the Fall '07 term at Duke.
- Fall '07