Unit 4 Theory of Production and Cost in the Short and Long Run

Vocabulary

Using your dictionary, match words in A with their synonyms in B.

A	В
1. to produce	a) to give
2. cost	b) to employ
3. to provide	c) to pay
4. to invest	d) to buy
5. to charge	e) to overcome
6. to face	f) price
7. to hire	g) difference
8. to purchase	h) to manufacture
9. distinction	i) to put money in

Reading

1. Skim through text 23 and think of the suitable title.

TEXT 23

Managers must have information about the cost structure of their firms because the cost of producing the goods and services they sell provides the foundation for some of the most important decisions a manager makes: whether to operate or shut down a production facility; how much to produce if the firm does operate; how much to invest in capital equipment; and, frequently, even the price to charge for the product. Knowledge of the cost structure of the organization is also important for managers in government and in nonprofit organizations. As you will see, the structure of a firm's costs is determined by the nature of the production process that transforms inputs into goods and services, and the prices of the inputs used in producing the goods or services.

Managers face two different types of decision-making frameworks: short-run decisions and long-run decisions. Short-run decision making takes place when the level of usage of one or more inputs is fixed at a specific level. In a typical short-run situation, the manager has a fixed amount of plant and equipment with which to produce the firm's output. The manager can change production levels by hiring more or less labour and purchasing more or less raw materials, but the size of the plant is viewed by the manager as essentially unchangeable or fixed for the purposes of making production decisions in the short run.

Long-run decision making concerns the same types of decisions as the short run with one important distinction - the usage of all inputs can be either increased or decreased. In the long run, a manager can choose to operate in any size plant with any amount of capital equipment. Once a firm builds a new plant or changes the size of an existing plant, the manager is once more in a short-run decision-making framework. Sometimes economists think of the short run as the time period during which production actually takes place, and the long run as the planning horizon during which future production will take place. As it turns out, the structure of costs differs in rather crucial ways depending upon whether production is taking place in the short run or whether the manager is planning for a particular level of production in the long run.

2. Comprehension check.

Working in pairs, answer the questions:

1. Why is it important to have information about the cost structure of a firm?

2. What types of decisions do managers usually face?

3. What is the difference between short-run decisions and long-run ones?

Pre-listening task

1. The words and word combinations in A are in the text you will hear. Use your dictionary if necessary and match each of them with a definition in B.

А В

1. production a) to deal with

2. equipment b) a duty to deal with something

3. entertainment c) to cause somebody/something to take part in or be

4. to involve concerned with something

5. protection d) to make something in large quantities

6. theory e) ability to work well without making mistakes or

7. efficiency wasting time and energy

8. responsibility f) something that is used to interest and amuse people

9. manager g) the act of keeping somebody/something safe so

10. 10. to be concerned with that it is not harmed

h) a man or woman who controls a business

i) an idea that try to explain something

j) the things that are needed to do a particular activity

2. Work in small groups.

Now you are going to hear about some basic concepts of production theory. What do you think it is based on?

Preface each of your suggestion with one of the following according to what is true for you:

I think I know ... I'm not sure ...

I have no idea ... I don 't know ...

Listening

Listen to text 1 and answer the questions:

1. What is production?

2. What is production theory based on?

Reading

1. Skim through text 24 and think of the suitable title. TEXT 24

A production function is the link between levels of input usage and attainable levels of output. That is, the production function formally describes the relation between physical rates of input usage. With a given state of technology, the attainable quantity of output depends on the quantities of the various inputs employed in production.

A production function is a schedule (or table, or mathematical equation) showing the maximum amount of output that can be produced from any specified set of inputs, given the existing technology or state of the art of production. In short, the production function is a catalogue of output possibilities.

Many different inputs are used in production. So, in the most general case, we can define maximum output, Q to be a function of the level of usage of the various inputs, X. That is,

Q= f(X₁,X₂, ..., X_n)

But in our discussion we will generally restrict attention to the simpler case of one product being produced using either one input or two inputs. As examples of the two inputs, we will normally use capital and labour. Hence the production function we will usually be concerned with is

Q = f(L, K)

Where L and K represent, respectively, the amounts of labour and capital used in production. However, we must stress that the principles to be developed apply to situations with more than two inputs and, as well, to inputs other than capital and labour.

2. Comprehension check.

Working in pairs, answer the questions:

1. What is a production function?

2. What does the attainable quantity of output depend on?

3. What does the equation Q = f(L, K) mean?

3. Read the text again. Find and write down a word or words in the text that mean the same as the following definitions. They are in the same order as they appear in the text.

1. the purpose or special duty of a person or thing;

2. something that you put into something to make it successful;

3. something that can be achieved;

4. the amount, size or number of something compared to something else;

5. a measurement of the speed at which something happens during a particular period;

6. the scientific knowledge or equipment that is needed for a particular industry;

7. a number or an amount of something;

h) a statement that two quantities are equal;

i) the fact that something might exist or happen, but it is not likely to;

j) to put a limit on somebody or something;

k) an amount of money that you use to start a business or to put in a bank so that you

earn money on it; 1) work usually of a hard, physical kind I workers when thought of as a group.