More Simplifying Assumptions

The John Bates Clark model of the firm is already pretty simple. We are thinking of a business that just uses two inputs, homogenous labor and homogenous capital, and produces a single homogenous kind of output. The output could be a product or service, but in any case it is measured in physical (not money) units such as bushels of wheat, tons of steel or minutes of local telephone calls. In the short run, in addition, the capital input is treated as a given "fixed input." Also, we can identify the price of labor with the wage in the John Bates Clark model. (In a modern business firm, we have to include benefits as well as take-home wages. The technical term for the total, wages and benefits, is "employee compensation.")

We will add two more simplifying assumptions. The new simplifying assumptions are:

The price of output is a given constant.
The wage (the price of labor per labor hour) is a given constant.

Putting them all together -- just two kinds of input and one kind of output, one kind of output fixed in the short run, and given output price and wage -- it seems to be a lot of simplifying assumptions, and it is. But, as we will see in later chapters of the book, these are not arbitrary simplifying assumptions. They are the assumptions that fit best into many applications, and the starting point for still others.

Once we have simplified our conception of the firm to this extent, what is left for the director of the firm to decide.