Changes

[[Economics|Economics Lectures]] - <nowiki>[</nowiki>[[Economics_Lecture_One|1]] - [[Economics_Lecture_Two|2]] - [[Economics_Lecture_Three|3]] - [[Economics_Lecture_Four|4]] - [[Economics_Lecture_Five|5]] - [[Economics_Lecture_Six|6]] - [[Economics_Lecture_Seven|7]] - [[Economics_Lecture_Eight|8]]<nowiki>]</nowiki>

[[Economics|Economics Lectures]] - <nowiki>[</nowiki>[[Economics_Lecture_One|1]] - [[Economics_Lecture_Two|2]] - [[Economics_Lecture_Three|3]] - [[Economics_Lecture_Four|4]] - [[Economics_Lecture_Five|5]] - [[Economics_Lecture_Six|6]] - [[Economics_Lecture_Seven|7]] - [[Economics_Lecture_Eight|8]]<nowiki>]</nowiki>

<br>Sixth Lecture – The Long Run

Sixth Lecture – The Long Run

Instructor, Andy Schlafly

<br>I. Introduction

I. Introduction

==Introduction==

We are going to spend another week on the supply side: what you would produce if you were the President of a company.  Recall that microeconomics is about supply and demand.  When we are on the demand side, then we are discussing what you would buy as a consumer, and how much you would pay.  When we are on the supply side, we are considering what you would produce in managing a company.  Keep these concepts separate in your mind.

We are going to spend another week on the supply side: what you would produce if you were the President of a company.  Recall that microeconomics is about supply and demand.  When we are on the demand side, then we are discussing what you would buy as a consumer, and how much you would pay.  When we are on the supply side, we are considering what you would produce in managing a company.  Keep these concepts separate in your mind.

Today we are going to focus on the “long run.”   

Today we are going to focus on the “long run.”   

II. The Long Run

==The Long Run==

Jesus’ teachings were not always what the public wanted to hear.  At one point it seemed like nearly everyone wanted to abandon Him.  Jesus then turned to his apostles and said, “Will ye also go away?”  Simon Peter responded, “Lord, to whom shall we go? thou hast the words of eternal life.”  John 6:68 (KJV).  Peter was committed for the long run.  Over thirty years after Jesus’ crucifixion, Peter remained true to what he said and allowed himself to be crucified (upside down).  Jesus picked apostles for the long run.

Jesus’ teachings were not always what the public wanted to hear.  At one point it seemed like nearly everyone wanted to abandon Him.  Jesus then turned to his apostles and said, “Will ye also go away?”  Simon Peter responded, “Lord, to whom shall we go? thou hast the words of eternal life.”  John 6:68 (KJV).  Peter was committed for the long run.  Over thirty years after Jesus’ crucifixion, Peter remained true to what he said and allowed himself to be crucified (upside down).  Jesus picked apostles for the long run.

A typical firm can initially expect average unit costs to decline as it increases inputs (workers, facilities, etc.) from zero.  This is an increasing return to scale.  But at some point, call it input = X, those increasing returns disappear and the company can only obtain constant returns to scale.  It has attained its “minimum efficient scale” at that point.  It can continue to increase its inputs, but its output only increases by the same amount as its input.  Ultimately, the company will find that increasing inputs further does not even increase output much.  It has too many workers or facilities at that point, and it begins experiencing decreasing returns to scale.

A typical firm can initially expect average unit costs to decline as it increases inputs (workers, facilities, etc.) from zero.  This is an increasing return to scale.  But at some point, call it input = X, those increasing returns disappear and the company can only obtain constant returns to scale.  It has attained its “minimum efficient scale” at that point.  It can continue to increase its inputs, but its output only increases by the same amount as its input.  Ultimately, the company will find that increasing inputs further does not even increase output much.  It has too many workers or facilities at that point, and it begins experiencing decreasing returns to scale.

III. Costs

==Costs==

Well-planned long-run changes should always be more efficient than short-run adjustments.  For example, it should always be cheaper to hire a new employee at the basic wage than to pay time-and-a-half for existing employees to work overtime.  It should always be more efficient to build a facility the way you need it than to pay someone else to rent a facility that is not exactly what you need.  There may be reasons why you do not want to take a risk on a new facility, but efficiency is always on the side of long-run expenses.

Well-planned long-run changes should always be more efficient than short-run adjustments.  For example, it should always be cheaper to hire a new employee at the basic wage than to pay time-and-a-half for existing employees to work overtime.  It should always be more efficient to build a facility the way you need it than to pay someone else to rent a facility that is not exactly what you need.  There may be reasons why you do not want to take a risk on a new facility, but efficiency is always on the side of long-run expenses.

Charlie Chaplin mocked this division of labor in the mostly silent movie, “Modern Times,” made in 1936.  In it, he portrays a factory working toiling in a dehumanizing position under the pressure of a mean boss.  Charlie is just trying to earn a decent living and buy a house for his wife Paulette and himself, but bad luck keeps getting the way.  The theme of class struggle occurs repeatedly in politics to this day.  In 1988, Democratic presidential candidate Michael Dukakis emphasized the need for Americans to have good jobs, not just any job.

Charlie Chaplin mocked this division of labor in the mostly silent movie, “Modern Times,” made in 1936.  In it, he portrays a factory working toiling in a dehumanizing position under the pressure of a mean boss.  Charlie is just trying to earn a decent living and buy a house for his wife Paulette and himself, but bad luck keeps getting the way.  The theme of class struggle occurs repeatedly in politics to this day.  In 1988, Democratic presidential candidate Michael Dukakis emphasized the need for Americans to have good jobs, not just any job.

IV. Accounting

==Accounting==

Keeping track of all the revenue, expenses and profits is the task of “accountants”.  This is its own profession: like doctors, lawyers, ministers, teachers, and so on, there is the profession of “accounting”.  You take courses in this in college, and can pass exams to become a certified public accountant (CPA).  They provide services to businesses and earn a fine living.  It involves numbers, but never becomes more complicated than ordinary arithmetic.

Keeping track of all the revenue, expenses and profits is the task of “accountants”.  This is its own profession: like doctors, lawyers, ministers, teachers, and so on, there is the profession of “accounting”.  You take courses in this in college, and can pass exams to become a certified public accountant (CPA).  They provide services to businesses and earn a fine living.  It involves numbers, but never becomes more complicated than ordinary arithmetic.

Occasionally a major company will suddenly declare itself to be broke and will ask the government for a “bailout” to save its jobs.  The car maker Chrysler did this about 25 years ago.  The federal government, despite substantial criticism, provided cheap loans to Chrysler to keep it out of bankruptcy.  So many jobs were at stake that there was political benefit to some officials for doing this.  But don’t expect the government ever to save a company you work for from going bankrupt.  Should the government bail out a company to keep it from going bankrupt?

Occasionally a major company will suddenly declare itself to be broke and will ask the government for a “bailout” to save its jobs.  The car maker Chrysler did this about 25 years ago.  The federal government, despite substantial criticism, provided cheap loans to Chrysler to keep it out of bankruptcy.  So many jobs were at stake that there was political benefit to some officials for doing this.  But don’t expect the government ever to save a company you work for from going bankrupt.  Should the government bail out a company to keep it from going bankrupt?

V. Alfred Sloan

==Alfred Sloan==

Born in 1875 in Brooklyn, Alfred P. Sloan, Jr., preferred studying over playing.  After attending college, he went to work in ball-bearing factory in New Jersey.  His employer was having financial difficulties, and Alfred persuaded his father to buy the troubled company at a discount.  His father was an importer of coffee and knew nothing about the ball-bearing business.  Alfred took it over.

Born in 1875 in Brooklyn, Alfred P. Sloan, Jr., preferred studying over playing.  After attending college, he went to work in ball-bearing factory in New Jersey.  His employer was having financial difficulties, and Alfred persuaded his father to buy the troubled company at a discount.  His father was an importer of coffee and knew nothing about the ball-bearing business.  Alfred took it over.

Times are different today, and GM may no longer deserve that motto.  GM is now one of the largest private employers in Mexico.  In its defense, it would say it has to move production to Mexico to lower its costs and compete with cars imported from Japan and Korea.

Times are different today, and GM may no longer deserve that motto.  GM is now one of the largest private employers in Mexico.  In its defense, it would say it has to move production to Mexico to lower its costs and compete with cars imported from Japan and Korea.

VI. Assignment

==Assignment==

Read and, if necessary, reread the above lecture.   

Read and, if necessary, reread the above lecture.   

Homework questions:

Homework questions:

Introductory:  1.  “Accounting profit” is ________ minus _________.

===Introductory===

 

1.  “Accounting profit” is ________ minus _________.

2.  Suppose your company spends $10,000 on labor and $30,000 on equipment for an output of 5000 widgets.  You increase your labor costs to $15,000 and your equipment costs to $45,000, and your output increases to 8000.  Describe your return to scale:  increasing, constant, or decreasing?

2.  Suppose your company spends $10,000 on labor and $30,000 on equipment for an output of 5000 widgets.  You increase your labor costs to $15,000 and your equipment costs to $45,000, and your output increases to 8000.  Describe your return to scale:  increasing, constant, or decreasing?

Intermediate: 3. Suppose the population doubled and the other utilized economic inputs (air, water, capital, etc.) doubled as needed.  What would happen to economic output, such as new inventions and food production?  In other words, what is the return to scale from increasing population (labor) and other inputs?

===Intermediate===

 

3. Suppose the population doubled and the other utilized economic inputs (air, water, capital, etc.) doubled as needed.  What would happen to economic output, such as new inventions and food production?  In other words, what is the return to scale from increasing population (labor) and other inputs?

4. Suppose you hire an employee who just took this course, and he says you should invest everything you have in a new facility to reap long-run efficiencies.  Why might you say “no”?

4. Suppose you hire an employee who just took this course, and he says you should invest everything you have in a new facility to reap long-run efficiencies.  Why might you say “no”?

7. Suppose your classmate’s company grew and grew, until it had 1 million employees.  But then the economy had a downturn, and you faced bankruptcy.  You were in the legislature and your classmate begged you to sponsor legislation to give his company a special zero-interest government loan to make it through the tough times.  Should you?

7. Suppose your classmate’s company grew and grew, until it had 1 million employees.  But then the economy had a downturn, and you faced bankruptcy.  You were in the legislature and your classmate begged you to sponsor legislation to give his company a special zero-interest government loan to make it through the tough times.  Should you?

Honors:

===Honors===

8. Suppose you invented fertilizer that is costly to make but has an ever-increasing marginal product.  Suppose you own an acre of farmland in South Jersey, and now must decide between spending your money on buying more acres to use the fertilizer, or making more fertilizer.  Which should you do?  Explain.

8. Suppose you invented fertilizer that is costly to make but has an ever-increasing marginal product.  Suppose you own an acre of farmland in South Jersey, and now must decide between spending your money on buying more acres to use the fertilizer, or making more fertilizer.  Which should you do?  Explain.

10. The tremendous economic growth of the 1980s and 1990s resulted from the “supply side” economic policies of President Ronald Reagan, which boosted production by cutting taxes and encouraging investment.  Why might the supply side be more important than the demand side?

10. The tremendous economic growth of the 1980s and 1990s resulted from the “supply side” economic policies of President Ronald Reagan, which boosted production by cutting taxes and encouraging investment.  Why might the supply side be more important than the demand side?