EconAir

    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...

  To an economist, the word “cost” implicitly has the word “opportunity” in front of it.  Not knowing the difference between accounting cost and opportunity cost can lead to some serious pricing mistakes and misallocation of resources. Saudi Arabia is one of the world’s three large crude oil producers, pumping over 10 million barrels per day. (A barrel is 42 gallons.) About 2.5 million barrels per day are refined for domestic consumption. Consumption of domestic oil has been rising rapidly. Saudi Arabia is the world’s most inefficient   user   of oil. The country subsidizes the price of gasoline and electricity. It has the world’s highest oil consumption per capita. Besides fuel, oil is used to generate electricity and desalinize water. It has been common for families to leave their air conditioning on even when going on vacation. Some offices are so cold that employees wear sweaters.   Prices to consumers are low because of low crude oil production costs and th...