Chapter 11 - CHAPTER 11 Decision Time Frames The biggest...

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CHAPTER 11 Decision Time Frames: The biggest decision that an entrepreneur makes is in what industry to establish a firm. The decision depends on background knowledge and profit prospects. Decisions about the quantity to produce and the price to charge depend on the type of market in which the firm operates. The decisions on how to produce a given output do not depend on the type of market in which the firm operates. All types of firms in all types of markets make similar decisions about how to produce. A firm that plans to change its output rate tomorrow has fewer options than one that plans to change its output rate six months or six years from now. The Short Run: The quantity of at least one factor of production is fixed. For most firms, capital, land, and entrepreneurship are fixed factors of production and labor is the variable factor of production. We call the fixed factors of production the firm’s plant; in a firm’s short run, a firm’s plant is fixed. To increase output in the short run, a firm must increase the quantity of a variable factor of production, which is usually labour. Short-run decisions are easily reversed. The firm can change its production in its short run by increasing or decreasing the amount of labour it hires. The Long Run: A time frame in which quantities of all factors of production can be varied. That is, the long run is a period in which the firm can change its plant. To increase output in the long run, a firm can change its plant as well as the quantity of labour it hires. Long run decisions are not easily reversed. Once a plant decision is made, the firm must usually live with it for some time. To emphasize this fact, we call the past expenditure on a plant that has no resale value a sunk cost. A sunk cost is irrelevant to the firm’s current decisions. Short-Run Technology Constraints: Product Schedules: Total Product is the maximum output that a given quantity of labour can produce. With more labour employed, total production increases. The Marginal Product of labour is the increase in total product that results from a one-unit increase in the quantity of labour employed. The Average Product of labour is equal to the total product divided by the quantity of labour employed. As more labour is hired, marginal product initially increases than begins to decrease. The same trend is seen for average product. (See Table 11.1, 253) Product Curves: Graphs of the relationships between employment and the three product concepts.
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