A factor of production that cannot be varied in the short‐run is called a fixed factor of production. A factor of production that can be varied in the short‐run is called a variable factor of production. For example, the number of workers the firm employs or the quantities of raw materials the firm uses can be varied on a day‐to‐day basis. Other factors of production, however, are variable in the short‐run. The long‐run is defined as the period during which all factors of production can be varied. The short‐run is defined as the period during which changes in certain factors of production are not possible. In the long‐run, the firm can adjust the size of its factory and its use of machinery and equipment, but in the short‐run, the quantities of these factors of production are considered fixed. For example, the size of the firm's factory, its machinery, and other capital equipment cannot be varied on a day‐to‐day basis. In the short‐run, some of the factors of production that the firm needs are available only in fixed quantities. Variable and fixed factors of production. The firm's production decision is to determine how much of each factor of production to employ. In order to produce this good, the firm must employ or purchase a number of different factors of production. In maximizing profits, firms are subject to two constraints: the consumers' demand for their product and the costs of production.Ĭonsider a firm that produces a single good. The theory of the firm assumes that the firm's primary objective is to maximize profits. A firm is defined as any organization of individuals that purchases factors of production (labor, capital, and raw materials) in order to produce goods and services that are sold to consumers, governments, or other firms. The theory of the firm provides an explanation for the market supply of goods and services. The theory of the consumer is used to explain the market demand for goods and services. Labor Demand and Supply in a Perfectly Competitive Market.Equilibrium in a Perfectly Competitive Market.Monopolistic Competition in the Long-run.Demand in a Perfectly Competitive Market.Classical and Keynesian Theories: Output, Employment.
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