This course offers an introduction to the functions of individual decision-makers—both consumers and producers—within the larger economic system. Emphasis is on the nature and functions of product markets, the theory of the firm under varying conditions of competition and monopoly, and the role of government in promoting efficiency in the economy. Most people make the incorrect assumption that economics is ONLY the study of money. My primary goal in this course is to shatter this belief. During this course, we will be addressing the above questions as well as many more relating to: -the environment -love and marriage -crime -labor markets -education -politics -sports -business My main goal is to show you the way economists think and how to use this analytical system to answer questions related not only to these and other important human issues, but to anything you end up doing with your life after this class. After all, as you will quickly find out, I believe that everything is economics!
2.2. The Production Process at a Glance
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Microeconomics Principles
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Production and Costs
Welcome to your fifth week! This module we will begin covering the theory of the firm, which will take us basically three modules to finish. Economists call this section of the course, "The Economics of the Lemonade Stand." And that title makes perfect sense, since the concepts we cover can be used by anyone, from someone owning a lemonade stand, to a car manufacturing company, to a hair salon, to a burrito stand, etc.
Rencontrer les enseignants
Dr. José J. Vázquez-CognetClinical Professor
Department of Economics
So, what do you think of the game? Well, you can imagine in, in a class like,
like, large class there's a lot more noise, you have the privilege of watching
this in a very, in a more, simulated way, and understand this little better.
So, there's a lot here, as a simulated product, we're not really producing
anything, the only thing we we're producing was essentially tennis balls
that go from one bucket to the next. So every time a tennis ball goes from one
bucket to the next, that's one unit of output that we created.
We have some sort of assembly line, and we're changing that assembly line, and see
what, and understand how that affected the number of balls, tennis balls that are
produced from one bucket to the next. It's a production process.
Right? You have some inputs, you produce
something, and you do something with those inputs, and you produce something.
So let's begin by understanding that, begin with that simple example, to try to
understand production a little better. First, let's think about the inputs.
What are the different inputs that the students were using to produce the number
of balls in the second bucket? Well, one clear input is you need
students, you need workers, so that, that was one input, the workers that you have.
So these are their inputs. Then what else you have?
You have tennis balls, right? But that was more of the production, that,
so we're, we're going to keep the tennis balls out, since they are inputs in the,
in the first bucket, and they become output in the last bucket let's keep let's
keep it aside for now. You also have the buckets, right, the
actual buckets were also an input in production.
So, if we account, you also have the time that it takes to pass one ball to the
other, pall, other ball, but if we, we say that, that time is really working hours,
we essentially have two basic inputs in this a production process.
We have workers, and we have the students, and we have the buckets.
Alright? Again, assuming that, that we're not
counting the tennis balls, because they, they cannot convert that into an output.
So, these are two really good classification, because as you turn out,
every and every round, we were changing one of this inputs, and maintaining the
other inputs the same. You remember?
One of these inputs that we would change is the number of workers.
Every time, in every round, we were changing that.
So in, in our game, this was a variable input.
This was an input that in every round was different.
The other one was the same, we kept that input the same, it was always the same
number of buckets. So, to use terminology of economics, we
can call the workers, the students, right, in the in the game, the variable input,
and the buckets in the game was the fixed input.
Now, does that's any, does that have any analogy to the real world?
Well, let's go back and think about the black dog example.
He actually, in, in my talk, in our talk with him, he actually himself specify that
he does consider some of his inputs fixed, and some of his inputs variable.
So I'm going to let you hear from him, and then we're going to come back here and see
we can identify what he said. >> Well, there's a lot of other costs that
would be included in that, I mean all the, the constant costs.
You know, just keeping the lights on, paying the staff, all that sort of thing.
We have, you know, try to keep like the, the wages, we try to aim at around 20%, a
little lower if we can. But our wages are a little high because we
can't be as efficient because of the setup of our building.
But you, you have things that you aim at and just try to work with what you can.
The labor is going to fluctuate with the number of sandwiches we sell, and that is
easy to see from the day that we opened. We sell a lot more sandwiches now and even
in the small space we have, we've had to add more people just to serve that many
more sandwiches during the day, so that is one of the costs that's going to change.
The light bill, I would say is a fixed cost, that's something that stays the same
all the time. As far as producing the food, we started
with two cooks in our, on our serving line, and then we realized at a certain
point if we added a third cook, that we would be able to produce the food faster,
and be able to move more people in and out.
And so the third cook was more efficient, but we can't add anymore than that,
because there's not enough space, so that's sort of the maximum that we
reached. >> So, he actually mentioned a lot of
inputs, but what clear, fixed input that he, that he knows in his mind that he,
that he's, he's actually, at capacity on that.
He can, have, you know, the problem he has too, too little of that, is kitchen space.
And the problem he's running is that he, you see that he just doesn't have a big
enough kitchen to accomodate all the, all the number of demand he has.
So for him, a clear fix input that he cannot change that at least in his mind
is, is the kitchen. Now, what are some of the variable inputs
he's had? Well he, he mentioned, I think he
mentioned the lighting, and some of the workers and stuff.
Well let's focus first on that fixed input.
Now why can't he just change that? I mean, clearly this idea of fixed and
variable, it really, you know, fuzzy because, you know, he could open another
store. But the problem is that it would take time
for him to open another store. And I don't know if you heard it, in our,
but in our discussion with him, he clearly said that he has been investigating
opening in other locations, but this actually will take time to come up with
the money to actually, to get another loan.
So it's not really fixed all the time, the kitchen.
He could open another restaurant, or he could expand this building and build a
bigger kitchen. But it is fixed, and for some time, it's
going to be fixed. So, the determination of whether an input
is fixed or variable, seems like it's determined by the time period.
So then we have to introduce time periods. So we're going to call, I'm going to do
two terms here, long-run, to the time period in which some inputs are fixed.
So, how long is that? It depends.
If you have if you going to start pizzeria and open get a one year rent on your
location, you have to pay the rent no matter what.
So during that time, the rent is a fixed input for you, the place is fixed.
So for, you rent the place for a year, in the case of a, a black dog owner, I think
for him, it has taken him 4 years to start thinking about expanding, right?
So for him, you know, expanding takes longer, so the, the long term, will take
longer. So, how long is it?
We don't really know, it depends. But we know that there is a period of
time, in which some of your inputs, will be fixed.
Now, we going to call the short run, and the timing which all inputs are variable.
And clearly workers is one input that is variable all the, most of the time.
Because, he could actually close his door, and if he doesn't open it, this door one
day, he doesn't have to pay his workers, right, so, he doesn't have to use them.
And clearly, he actually has said at a time that, you know, the more, the more
workers he hires, the more sandwiches he will be able to produce.
Right, so, clearly, workers are variable input.
But at the same time kitchen will become a variable input, kitchen space, if he has
time to change it. So in the long run, essentially, all of
the inputs are variable, and there's really no fixed Inputs.
So that is kind of the division we're going to make in terms of inputs.
Now a further kind of definition word for you, is that economists tend to refer to
viral inputs as labor, because there, those usually the, the input that change
is the workers labor. And they tend to refer to fixed inputs as
capital, because capital we tend to associate it with plant, place and
machine, and those are things that take longer, to expand, to get rid of, and to
buy, if you need to buy them. So it's just so you see that sometimes
economists will use that language, that usually you use capital as a fixed input
and laborer as a, a variable input. We try to refer to them with both things
so you actually don't get confused, but just have it in your mind that sometimes
you, you'll see that language. >> Produced by OCE, Atlas Digital Media at
the University of Illinois, Urbana Champaign.
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