Supply horizon

All these cost calculations can give you a real headache. They can also give you second thoughts about jumping into Tight Jeans, restaurant management, or any other business. There are tough choices to be made. A given firm can produce many different rates of output, each of which entails a distinct level of costs. Someone has to choose which level of output to produce and thus how many goods to supply to the market. That decision has to be based not only on the capacity to produce (the production function) but also on the costs of production (the cost functions). Only those who make the right decisions will succeed in business.

The production decision The supply decision has two dimensions, a short-run horizon and a long- run horizon. The short run is characterized by the existence of fixed costs. A commitment has been made: a factory has been built, an office leased, or machinery purchased. The only decision to make is how much output to produce with these existing facilities. This is the production decision, the choice of how intensively to use available plant and equipment. This choice is typically made daily (e.g., jeans production), weekly (e.g., auto production), or seasonally (e.g., farming).

The most important factor in the production decision is marginal costs. Producers will be willing to supply output only if they can at least cover marginal costs. If the marginal cost of a pair of jeans is $11, then there is no profit in producing an additional pair unless the price of jeans is at least $11. Accordingly, the marginal cost curve is a basic determinant of short-run production decisions.

Marginal costs may also dictate short-run pricing decisions. Suppose the average cost of serving a steak dinner is $12, but the marginal cost is only $7. How low a price can the restaurant charge for the dinner? Ideally, it would like to charge at least $12 and cover all of its costs. It could at least cover marginal costs, however, if it charged only $7. At that price the restaurant would be no worse or better off for having served an extra dinner. The additional cost of serving that one meal would be covered. Such marginal cost considerations play a critical role in supply behavior.

The investment decision The long run opens up a whole new range of options. In the long run, we have no lease or purchase commitments. We are free to start all over again; with whatever scale of plant and equipment we desire. There are no fixed costs in the long run. Accordingly, long-run supply decisions are more complicated. If no commitments to production facilities have been made, a producer must decide how large a facility to build, buy, or lease. Hence the size (scale) of plant and equipment becomes an additional option for long-term supply decisions. In a long-run (no fixed costs) situation, a firm can make the investment decision.

Note that the distinction between short- and long-run supply decisions is not based on time. The distinction instead depends on whether commitments have been made. If no leases have been signed, no construction contracts awarded, no acquisitions made, a producer still has a free hand. With no fixed costs, the producer can walk away from the potential business at a moment's notice.

Once fixed costs are incurred, the options narrow. Then the issue becomes one of making the best possible use of the assets (e.g., factory, office space, equipment) that have been acquired. Once fixed costs have been incurred, it's hard to walk away from the business at a moment's notice. The goal then becomes to make as much profit as possible from the investments already made.

1. Formulate the main idea of the text.

2. Find in the text English equivalents of these words and phrases.

1. важкий вибір 2. рівень виробництва	11. короткострокова перспектива	20.покривати граничні витрати
3. визивати	12.довгострокова перспектива	21. відповідно
4. постачати на ринок	13. постійні витрати	22.вирішальний фактор, показник
5. здатність виробляти	14.доручення, зобов’язання	23. плата за
6. виробнича функція	15.наявні грошові засоби	24. додатковий обід
7.витрати виробництва	16.виробниче рішення	25.зобов’язання по замовленням
8. функція витрат	17.наскільки інтенсивно використовувати	26.рішення про інвестиції
9. наслідувати бізнес	18. граничні витрати	27. придбання
10. розмір, величина	19.постачати продукцію	28.приміщення офісу

3. Are these statements true or false? Correct the false ones.

1. The production decision is the short-run choice of how much output to produce with existing facilities.

2. At a minimum, a producer will be willing to supply output only if price at least covers marginal cost.

3. The long run is characterized by an absence of fixed costs.

4. In a short run decision a firm chooses among all possible production techniques.

5. The decision how many goods to supply to the market has to be based on the capacity to produce.

6. The investment decision entails the choice of whether to acquire fixed costs, that is, whether to build, buy, or lease plant and equipment.

4. Answer the questions:

1. Who will be succeeding in business?

2. What two dimensions does the supply have?

3. What is the short run characterized by?

4. What is the production decision?

5. What is the most important factor in the production decision?

6. What is the long – run characterized by?

7. What is the investment decision?

8. What is the distinction between short – and long – run supply decisions based on?

5. Write a summary of the text.

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