Firm Behavior Thinking about timeframe…1) Short Run• At least one fixed factor of production• No entry or exit into the industry (Small coffee shop, 1 register, 1 espresso, size, table space: ALL FIXED…labor, coffee can be CHANGED)• example: Honda- new factory- complicated to add, takes a LONG time, each year is a short run compared to the time it takes to build a factory Long Run• No fixed factors of production (new businesses can appear, add more registers, space, espresso machines)• Firms can enter and/or exit• example: Hot Dog cart- If you decided, things are already prosperous and you want two hot dog stands it would not be easy to get it up in one day but in acouple is doable• Friday is the long runTimeframe is context-specific in economics2) Costs You're in charge…• The boss has left you in charge• Production schedule of 500 units• All units have been committed to customers • Average cost: $200 per unit• The phone rings: A potential customer!• The caller will pay $450 for one unit• Average cost for 501 units: $201• What should you do?• Call the boss and ruin her weekend? (NO!)• Sell a unit to the caller but don't change output? (NO!)• Tell the caller "yes" and boost production level?• Tell the caller "no"?• Is accommodating the caller in the interest of the firm?• Tell the caller "yes"…• Before the call: Output=500, Average Cost= $200• Total Cost = $100,000• After the call: Output=501 Average Cost= $201• Total Cost= $100,701• Marginal Cost=701…..Total Change in cost divided by change in total output• Oops• Focus on the margin:• Marginal cost of increasing output is $701• Marginal benefit of increasing output $450• The rational decision: leave the output aloneRational decisions focus on the margin3) Short Run ProductionLabor Output Marginal Product Average0 0 ----- ----1 20 20 202 35 15 17.53 45 10 154 50 5 12.5MP= ∆Q / ∆LDiminishing marginal product---due to the fact that it is the short--if there is one person working they can do what they want without coordinating..one personcould be waiting for the other..therefore less productiveIn the short, eventually we will always encounter diminishing returns The longer we push something, the less we get out (THE FRUIT EXAMPLE)You're gpa for one semester is the margin, the average is your cumulative gpa.The average chases the margin.Graph that goes up and levels off…slope is
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