On the Firm's Short-Run Quantity Adjustment

In this paper we shall study the firm's short-run quantity adjustment; that is, we shall attempt to explain what motivates or induces a firm to change its level of production. Abstracting from the investment in fixed capital, the analysis focuses on the firm's adjustment of goods in process. It is, therefore, a short-run analysis. By supposing that most of the time the real economy experiences a goods market disequilibrium, our problem becomes more interesting than if we suppose a Keynesian equilibrium,1 let alone a Walrasian equilibrium. For disequilibrium in the goods market would certainly require most firms to adjust their production. From the viewpoint of recent macroeconomic disequilibrium dynamics (e.g. Uzawa, 1974; Tobin, 1975; Yoshikawa, 1981), it is crucial to understand why and how a representative firm changes its production level since this directly determines the change in real GNP-an important macroeconomic variable. By the nature of the problem, it is unfortunately hard to get a definite answer to the question of whether or not the aggregate goods market is actually out of quantity equilibrium in the Keynesian sense. The quantitative importance of inventory cycles is, however, generally acknowledged. This suggests that the adjustment of production is not so prompt as to maintain Keynesian income-expenditure equilibrium, and that, therefore, an analysis of the Keynesian disequilibrium process is appropriate. In Section I we describe the model employed. The firm's optimal behaviour is derived in Section II. We show that the change in the firm's production level, measured by the amount of goods in process, is an increasing function of what Tobin (1969) called q in his theory of fixed investment. The variable q is defined as the ratio of the value of goods in process evaluated in the financial market to their replacement cost. Section III discusses some implications of this analysis

Economics · Microeconomics · Process (computing) · Computer Science · Economic theories and models · Economic Theory and Policy · Monetary Policy and Economic Impact

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