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Production Functions and Supply Chains

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    Introduction We now take a look at what is behind supply-side decision-making, how corporations decide how much to produce and sell.  Keep in mind that economic theory assumes that producers are profit-maximizers. This means that producers will expand output only if they expect this action will increase profit. Production Function What is a production function? A production function is a general statement about how a company turns inputs into output. Inputs In some textbooks, inputs are grouped into three categories – land, labor and capital. Land is shorthand for land and natural resources. But land is not an economic resource until farmers use energy, tools, machines, skills and knowledge to turn it into farmland to grow food. Natural resources are also not economic resources. Trees have to be processed to become timber and paper. Iron ore has to be mined and smelted (removed from rocks) and turned into steel. Crude oil, a polluter of water until 1859 (first oi...
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I Read the Financial News Today

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September 16, 2026:     A Day in the Life of a Retired Finance Professor The Fed raises the Fed funds rate for the first time since 2023. This will raise most short-term interest rates, in response to a rising inflation rate. President Trump is not pleased. European countries are pulling central bank gold out of the Fed’s gold vault in New York. Gold is slowly replacing the dollar as a central bank reserve asset. (Personal note:  Many years ago I was in a small group given a tour of the NY Fed that included going into the Fed's gold vault. As we entered, the guide said "Don't even think about it.") Many countries are exploring and implementing ways not to use the dollar in international transactions. One method is to use central bank digital currencies to settle international trade payments instead of the dollar. Scott Bessent, the U.S. Secretary of the Treasury, announces a government buy-back of a small amount of U.S. 10-year Treasuries ($4-$6 billion) to lower long...
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Critique of Basic Economic Theory

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  Assumptions Economic theory starts with a set of assumptions about behavior.  The most basic is the assumption of rationality in the limited sense that individuals can calculate and compare the marginal costs and marginal benefits of decisions.  They then pick that decision that maximizes net benefit. Economists and psychologists have attacked this assumption.  Some have won Nobel Prizes in Economics. It is refuted by virtually everything that has been learned in cognitive psychology and neuroscience. Yet it remains the foundation of economic theory. This assumption is not even supported by one of economists’ favorite tool, game theory.  One famous experiment, the “ultimatum game,” demonstrates that moral considerations can overcome maximizing income. This outcome seems to hold for many different social groups and many different cultures. Profit Maximization Maybe the most defensible assumption is profit maximization.  While it is...
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