Changes

In the “long run,” you maximize efficiency by making fundamental changes to your business.  If you own a professional baseball team, a short-run change to increased demand for tickets by fans would be to build temporary bleachers.  But the fans would prefer to pay more for permanent seats, and you would make more money with a larger stadium.  So the long-run change is to build an entire new stadium.  Many owners have done that.

In the “long run,” you maximize efficiency by making fundamental changes to your business.  If you own a professional baseball team, a short-run change to increased demand for tickets by fans would be to build temporary bleachers.  But the fans would prefer to pay more for permanent seats, and you would make more money with a larger stadium.  So the long-run change is to build an entire new stadium.  Many owners have done that.

== The Short Run and Long Run ==

 

== Introduction: the Short Run and Long Run ==

Keep in mind that in this Lecture we are focusing on "supply" rather than "demand".  We look at how companies decide how much product to make and put out into the market.  How many goods should a company produce, or how many services should it provide?

Keep in mind that in this Lecture we are focusing on "supply" rather than "demand".  We look at how companies decide how much product to make and put out into the market.  How many goods should a company produce, or how many services should it provide?

The “long run” consists of a time period long enough to make basic and permanent changes, like building new factories, buying new equipment, and hiring and training new employees.  In a sporting contest, it would include scouting and drafting new players, or building a new weight room.  Everything can be adjusted in the “long run”: workforce, facilities, materials, equipment, investment, etc.

The “long run” consists of a time period long enough to make basic and permanent changes, like building new factories, buying new equipment, and hiring and training new employees.  In a sporting contest, it would include scouting and drafting new players, or building a new weight room.  Everything can be adjusted in the “long run”: workforce, facilities, materials, equipment, investment, etc.

For now, let’s focus on the “short run.”  The key concepts for the "short run" are “marginal cost” and “marginal revenue.”  How much does it cost to make one more widget, and much revenue does that extra widget generate for the company?  That additional cost per unit is called “marginal cost.”  The additional revenue per unit is called “marginal revenue.”  As we discussed in the last Lecture, as long as marginal revenue is slightly higher than marginal cost, then it makes sense to produce more goods or services (e.g., produce that extra widget).  Typically, companies continue making more and more goods until marginal revenue falls below marginal cost, at which time they stop production because they begin to lose money on each additional good they produce.  This is just like our example in our last Lecture where the store owner closes his store at night as soon as the marginal cost of his electricity and employee wages starts to exceed the marginal revenue from new customers coming into the store at night.

For now, let’s focus on the “short run.”  The key concepts for the "short run" are “marginal cost” and “marginal revenue.”  How much does it cost to make one more widget, and much revenue does that extra widget generate for the company?  That additional cost per unit is called “marginal cost.”  The additional revenue per unit is called “marginal revenue.”  As we discussed in the last Lecture, as long as marginal revenue is slightly higher than marginal cost, then it makes sense to produce more goods or services (e.g., produce that extra widget).  Typically, companies continue making more and more goods until marginal revenue falls below marginal cost, at which time they stop production because they begin to lose money on each additional good they produce.  This is similar to when a store owner closes his store at night once the marginal cost of his electricity and employee wages starts to exceed the marginal revenue from new customers coming into the store.

===The Short Run: Marginal Product===

===The Short Run: Marginal Product===

Provide brief answers to '''''any four of the following questions''':

Provide brief answers to '''''any four of the following questions''':

9.  Suppose there is a sudden increase in the market price for a firm's widget.  The firm will hire more employees to produce more output until the point where the value of its marginal product of labor equals its _____________.  [Hint: the answer is NOT simply "marginal cost"].

8.  Suppose there is a sudden increase in the market price for a firm's widget.  The firm will hire more employees to produce more output until the point where the value of its marginal product of labor equals its _____________.  [Hint: the answer is NOT simply "marginal cost"].

10.  Explain the following from the lecture: if inflation is 10% per year for three years, but one particular good keeps the same price during those three years, then its opportunity cost and real price actually decreased.

9.  Explain the following from the lecture: if inflation is 10% per year for three years, but one particular good keeps the same price during those three years, then its opportunity cost and real price actually decreased.

11.  Are "long run" average costs lower than "short run" average costs and, if so, why?

10.  Are "long run" average costs lower than "short run" average costs and, if so, why?

12.  (Difficult, but try):  Your firm seeks to produce a certain level of output in the most efficient way (the lowest cost).  It should use its resources in which of the following ways:

11.  (Difficult, but try):  Your firm seeks to produce a certain level of output in the most efficient way (the lowest cost).  It should use its resources in which of the following ways:

(a) use materials that generate the highest marginal product

(a) use materials that generate the highest marginal product

<br>(d) use resources such that their marginal products per unit cost are equal

<br>(d) use resources such that their marginal products per unit cost are equal

13.  The greater the number of substitutes for a good, is it more or less price elastic?  Explain briefly.

12.  The greater the number of substitutes for a good, is it more or less price elastic?  Explain briefly.

14.  The smaller the proportion of income consumed by the purchase of a good, is it more or less income elastic?  Explain briefly.

13.  The smaller the proportion of income consumed by the purchase of a good, is it more or less income elastic?  Explain briefly.

15.  Would government prefer taxing a good that is price elastic or price inelastic?  Explain briefly.

14.  Would government prefer taxing a good that is price elastic or price inelastic?  Explain briefly.

16.  Suppose french fries cost $1 and ketchup 10 cents.  When the price of ketchup goes up to 20 cents, the quantity demanded for french fries falls by 10%.  What is the cross elasticity of demand for french fries with respect to ketchup?  Show your work and state whether these goods are complements or substitutes.

15.  Suppose french fries cost $1 and ketchup 10 cents.  When the price of ketchup goes up to 20 cents, the quantity demanded for french fries falls by 10%.  What is the cross elasticity of demand for french fries with respect to ketchup?  Show your work and state whether these goods are complements or substitutes.

=== Extra Credit for Anyone ===

=== Extra Credit for Anyone ===

17.  Discuss this statement: the most efficient "division of labor" in the world is ... traditional marriage between a man and woman.

16.  Discuss this statement: the most efficient "division of labor" in the world is ... traditional marriage between a man and woman.

== References ==

== References ==