Changes

Peter was obviously dedicated 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 the Apostles for the long run.

Peter was obviously dedicated 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 the Apostles for the long run.

There is a "long run" in most businesses also.  When you are doing business with a supplier you want to be confident it will still be there a year or five years later.  You want to set up your firm so that it is efficient for the long run.  Quick fixes are typically short-lived and inefficient, and long run planning is crucial to long run success.  People who become doctors or lawyers go through more education, when they do not make money, in order to try to succeed in the long run afterward.

There is a "long run" in most businesses also.  When you are doing business with a supplier you want to be confident it will still be there a year or five years later.  You want to set up your firm so that it is efficient for the long run.  Quick fixes are typically short-lived and inefficient, and long run planning is crucial to long run success.  People who become doctors or lawyers go through more education at short-term expense, in order to succeed in the long run afterward.

Efficiency is maximized by focusing on the long run.  As President of your widget company, you want to maximize the efficiency of your company.  You want the lowest total cost per unit.  You do not want idle workers or equipment.  You do not want wasted inventory.

Efficiency is maximized by focusing on the long run.  As President of your widget company, you want to maximize the efficiency of your company.  You want the lowest total cost per unit.  You do not want idle workers or equipment.  You do not want wasted inventory.

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.

That is true in life also.  When you make decisions, you are better off thinking about the long-run consequences.  Many mistakes are caused by short-term thinking.  If drug addicts considered the long-run impact of their decision to take drugs, then they would never try drugs.  By avoiding drugs they would save themselves from dying in a gutter some day or ending up homeless.

That is true in life also.  When you make decisions, you are better off thinking about the long-run consequences.  Many mistakes are caused by short-term thinking.  If drug addicts considered the long-run impact of their decision to take drugs, then they would never try drugs in the first place.  By avoiding drugs they would save themselves from dying in a gutter some day or ending up homeless.

Exercise is not always the most pleasant activity in the short run.  But its benefit is substantial for the long run.

Exercise is not always the most pleasant activity in the short run.  But its benefit is substantial for the long run.

Keeping track of all the revenue, expenses and profits of a firm 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 is never more complicated than ordinary arithmetic.  A personality that likes to keep track of financial matters and likes the stability of steady work, with little conflict, is often well suited to becoming an accountant.

Keeping track of all the revenue, expenses and profits of a firm 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 is never more complicated than ordinary arithmetic.  A personality that likes to keep track of financial matters and likes the stability of steady work, with little conflict, is often well suited to becoming an accountant.

It is the job of accountants to calculate the profits of a business: '''''Accounting profits equal total revenue minus explicit costs.'''''  The explicit costs are the expenses of the inputs, such as workers’ wages, cost of materials, and the cost of maintenance and depreciation on facilities like plants and equipment.  ("Depreciation" is the predictable wear and tear on something that makes it gradually less valuable and useful, such as depreciation of your car's tires every time to drive somewhere, because the tread wears down with every ride.)

It is the job of accountants to calculate the profits of a business.  A special term, "accounting profits," is defined as follows: '''''Accounting profits equal total revenue minus explicit costs.'''''  The explicit costs are the expenses of the inputs, such as workers’ wages, cost of materials, and the cost of maintenance and depreciation on facilities like plants and equipment.  ("Depreciation" is the predictable wear and tear on something that makes it gradually less valuable and useful, such as depreciation of your car's tires every time you drive somewhere, because the tire tread wears down with every ride.)

“Economic profit” is a broader concept than “accounting profit.”  “Economic profit” includes all of the implicit costs, such as the opportunity cost of the time and effort spent by an owner (which can be enormous) and also the opportunity cost of investment in the firm.  If a company has only a $1 “accounting profit” in a certain year, then it's economic loss is much bigger once you factor in all the opportunity costs.

“Economic profit” is a broader concept than “accounting profit.”  '''''“Economic profit” includes all of the implicit costs, such as the opportunity cost of the time and effort spent by an owner (which can be enormous) and also the opportunity cost of investment in the firm.''''' If a company has only a $1 “accounting profit” in a certain year, then its economic loss is much bigger once you factor in all the opportunity costs.

There are tricks of accounting to overstate the profitability of a company, and that has led to huge scandals and bankruptcies for firms like Enron.  If you ever consider investing in a firm, you should be aware of the distortions that are possible in accounting.  The rule “caveat emptor” (buyer beware) applies to investors just as much as consumers.

There are tricks of accounting to overstate the profitability of a company, and that has led to huge scandals and bankruptcies for firms like Enron.  If you ever consider investing in a firm, you should be aware of the distortions that are possible in accounting.  The rule “caveat emptor” (buyer beware) applies to investors just as much as consumers.

It is easy to overstate sales, particularly sales projections.  It is easy to overstate the value of a company’s inventory.  Something about money makes everyone want to exaggerate.  That’s because nobody can ever obtain enough money to satisfy themselves or their expectations.  Take all assertions about money with a grain of salt.  Even if there is a great deal of money somewhere, it is virtually never as much as people claim and never as meaningful as people pretend.

It is easy to overstate sales projections.  It is easy to overstate the value of a firm’s inventory (goods in its warehouse and store).  Something about money makes everyone want to exaggerate.  That’s because nobody can ever obtain enough money to satisfy themselves or their expectations.  Take all assertions about money with a grain of salt.  Even if there is a great deal of money somewhere, it is almost never as much as people claim and never as meaningful as people pretend.

Firms also find it easy to understate depreciation (wear and tear) and future liabilities.  Some companies, like Ford Motor Company, may actually be bankrupt once the true costs of its pensions for retired workers are taken into account.

Firms also find it easy to understate depreciation (wear and tear) and future liabilities.  Some companies, like Ford Motor Company, may actually be bankrupt once the true costs of their pensions for retired workers are taken into account.

Occasionally a major firm will suddenly declare itself to be broke and will ask the government for a “bailout” to save its jobs, as General Motors recently did.  The car maker Chrysler also 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 '''''your firm''''' from going bankrupt.   

Occasionally a major firm will suddenly declare itself to be broke and will ask the government for a “bailout” to save its jobs, as General Motors recently did.  The car maker Chrysler also 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 '''''your firm''''' from going bankrupt.   

Born in 1875 in Brooklyn, Alfred P. Sloan, Jr., was a hard-working student.  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 and spent all his time and energy trying to make a success out of the struggling firm.

Born in 1875 in Brooklyn, Alfred P. Sloan, Jr., was a hard-working student.  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 and spent all his time and energy trying to make a success out of the struggling firm.

In just six months Alfred was able to revive the company, and then ran it for 17 years before selling it in 1916 at a handsome profit to the founder of General Motors (GM) car company.  Alfred then joined GM and spent five years studying its operation in detail as he worked there.  He wrote and published “The Organizational Study,” which was the first treatise on management ever written.  Its inspiration was the U.S. Constitution and its system of checks and balances.  Sloan’s vision was to divide GM into many small divisions that could have their own revenue and cost targets, and check and balance other divisions in the company.  The high performers could be easily identified, rewarded, and given greater resources; the poor performers could be replaced.

In just six months Alfred was able to revive the company, and then ran it for 17 years before selling it in 1916 at a handsome profit to the founder of the General Motors (GM) car company.  Alfred then joined GM and spent five years studying its operation in detail as he worked there.  He wrote and published “The Organizational Study,” which was the first treatise on management ever written.  His inspiration was the U.S. Constitution and its system of checks and balances.  Sloan’s vision was to divide GM into many small divisions that could have their own revenue and cost targets, and check and balance other divisions in the company.  The high performers could be easily identified, rewarded, and given greater resources; the poor performers could be replaced.

Eventually Sloan himself was rewarded for his valuable work by being promoted to become Chairman of GM in 1923.  When Sloan took over leadership of GM, it had less than one-fifth of the car market.  Ford Motor Company, founded by the legendary Henry Ford, was much bigger and more successful, selling more than half of all cars in the market.  But within a mere eight years, by 1931, GM surpassed Ford based on Sloan’s organizational principles.  GM became the largest corporation in the world.  Sloan’s vision was for GM to make “a car for every purse and purpose.”  Many felt that GM's success was important to the success of the United States.  “What’s good for GM is good for America” became a popular saying due to Sloan’s leadership of the company.

Eventually Sloan himself was rewarded for his valuable work by being promoted to become Chairman of GM in 1923.  When Sloan took over leadership of GM, it had less than one-fifth of the car market.  Ford Motor Company, founded by the legendary Henry Ford, was much bigger and more successful, selling more than half of all cars in the market.  But within a mere eight years, by 1931, GM surpassed Ford based on Sloan’s organizational principles.  GM became the largest corporation in the world.  Sloan’s vision was for GM to make “a car for every purse and purpose.”  Many felt that GM's success was important to the success of the United States.  “What’s good for GM is good for America” became a popular saying due to Sloan’s leadership of the company.

Sloan was an example of what some students discussed in their answer to the homework question about charity and the free market.  Sloan made a fortune in the free market, and that enabled him to make enormous gifts to charity.  He kind donated much of his wealth to found the Sloan-Kettering Cancer Center in New York, considered the finest in the world for treating cancer.   

Sloan was an example of what some students discussed in their answer to the homework question about charity and the free market.  Sloan made a fortune in the free market, and that enabled him to make enormous gifts to charity.  He kindly donated much of his wealth to found the Sloan-Kettering Cancer Center in New York, considered the finest in the world for treating cancer.   

Long after Sloan died, GM began to fail.  In 2009, it failed and was taken over by the United States government.  Most firms do fail, if not in the first few years then later.  But Sloan's charity continues to help cancer patients at the Sloan-Kettering Cancer Center.

Long after Sloan died, GM collapsed.  In 2009, it failed and was taken over by the United States government.  Most firms do fail, if not in the first few years then later.  But Sloan's charity continues to help cancer patients at the Sloan-Kettering Cancer Center.

== "Real" Price and the CPI ==

== "Real" Price and the CPI ==

By comparing a change in price of a good to the change in the CPI, you can tell whether the real price of the good is becoming more or less expensive.  If the good’s price increases by less than the CPI’s increase, then the good has a real price that is falling.

By comparing a change in price of a good to the change in the CPI, you can tell whether the real price of the good is becoming more or less expensive.  If the good’s price increases by less than the CPI’s increase, then the good has a real price that is falling.

Now think about this: 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.  Think about that.  An honors homework problem will ask you to explain why.

Now think about this: 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.  Think about that.  An honors homework problem asks you to explain why.

==Assignment==

==Assignment==

Read and, if necessary, reread the above lecture.   

Read and, if necessary, reread the above lecture.  '''''Complete any 7 of the first 8 questions below''''':

 

1.  Fixed costs can be easily identified by seeing what the total costs are when output is _______.  Separately, give an example of a variable cost.

1.  Fixed costs can be easily identified by seeing what the total costs are when output is _______.  Separately, give an example of a variable cost.

2.  The Lecture mentioned how a prior student in this course is paying her way through college by working as a waitress in a fancy Manhattan restaurant.  Suppose her boss told her one day, "We were profitable last month.  To increase our profits next month, I'm going to doubt our number of waitresses so that we can serve more people!"  But our former economics student told him that his plan would fail because there is _____________ returns of scale in the restaurant, because more waitresses would result in more wasted time talking to each other and waitresses getting in the way of each other.

2.  The Lecture mentioned how a prior student in this course is paying her way through college by working as a waitress in a fancy Manhattan restaurant.  Suppose her boss told her one day, "We were profitable last month.  To increase our profits next month, I'm going to doubt our number of waitresses so that we can serve more people!"  But our former economics student told him that his plan would fail because there is _____________ returns of scale in the restaurant, because more waitresses would result in more wasted time talking to each other and waitresses getting in the way of each other.

3.  Give an example of a "short run" cost for a firm, and give an example of a "long run" cost.  It can be any type of firm.

3.  Give an example of a "short run" cost for a firm, and give an example of a "long run" cost.  This can refer to any type of firm, from a grocery store to a baseball team to a homeschool.

4.  Suppose you own a mechanics' shop that fixes cars, and you have 4 employees whom you pay $12 per hour.  On average your 4th employee can fix 3 cars an hour.  What is your marginal product (MP) and marginal cost (MC), and what is the minimum on average that you need to charge customers (your marginal revenue) for fixing cars?  (Assume your only cost is labor, and the customer pays the cost of any parts.)

4.  Suppose you own a mechanics' shop that fixes cars, and you have 4 employees whom you pay $12 per hour.  On average your 4th employee can fix 3 cars an hour.  What is your marginal product (MP) and marginal cost (MC), and what is the minimum on average that you need to charge customers (your marginal revenue) for fixing cars?  (Assume your only cost is labor, and the customer pays the cost of any parts.)

7.  Suppose you own and drive a taxicab, and its annual license fee is $1000 per year.  Suppose you learn that the license fee will increase to $1200 next year. Does this increase either increase, decrease, or have no effect on (a) marginal cost, (b) average variable cost, and (c) average total cost?   

7.  Suppose you own and drive a taxicab, and its annual license fee is $1000 per year.  Suppose you learn that the license fee will increase to $1200 next year. Does this increase either increase, decrease, or have no effect on (a) marginal cost, (b) average variable cost, and (c) average total cost?   

===Honors===

===Honors===

Provide brief answers to '''''all''''' of these questions.

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

 

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"].

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.

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"].

10.  Charity, revisited: Sloan's charitable efforts (Sloan-Kettering) have lasted longer than his business efforts (General Motors).  Is this just by chance, or are there reasons why charity lasts longer than business?  Feel free to revisit the issue of the interplay between the free market and charity.

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.

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

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

<br>(c) use as much material as possible until there are diminishing returns

<br>(c) use as much material as possible until there are diminishing returns

<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

=== Extra Credit for Anyone ===

=== Extra Credit for Anyone ===

13.  The most efficient "division of labor" in the world is ... traditional marriage between a man and woman.

14.  The most efficient "division of labor" in the world is ... traditional marriage between a man and woman.

== References ==

== References ==