it is argued that the prices of inputs to firms' production processes are fixed in the short run. One example of why this might be true is that some large firms enter into futures contracts for large deliveries of raw materials like wheat or lumber. Give two other examples of contracts which would cause inputs to a firm's production process to be fixed in the short run.
To find examples of contracts that could cause inputs to a firm's production process to be fixed in the short run, we need to understand the concept of fixed inputs. Fixed inputs are resources that cannot be easily varied in the short run, such as machinery, equipment, or labor contracts. These inputs typically have a fixed quantity or a predetermined cost over a certain period of time. Now, let's explore two additional examples that illustrate how contracts can lead to fixed inputs:
1. Lease Agreements: A firm may lease equipment or property under a contract that specifies a fixed cost or a fixed quantity of usage for a certain period. For instance, a manufacturing company might lease a production facility at a fixed monthly rental, ensuring a consistent cost for the input of the facility in the short run. Similarly, a transportation company might lease a fleet of vehicles under a contract that guarantees a fixed number of vehicles at a predetermined cost, locking in the input of transportation services.
2. Service Contracts: Service contracts can also contribute to fixed inputs in a firm's production process. This is commonly seen in industries where specialized services are required. For example, an IT company may have a fixed-term contract with an external software development team. The contract could outline a fixed cost and a specific scope of work over a defined period, ensuring a fixed input of software development services. Similarly, a consulting firm may have contracted experts who provide a fixed number of hours or services per month, creating fixed inputs in the short run.
By entering into these types of contracts, firms can secure inputs at predetermined costs or quantities, reducing uncertainty and potentially benefiting from favorable pricing arrangements. It's important to note that while these contracts can fix certain inputs in the short run, other inputs like raw materials and variable labor costs may not be completely fixed due to variations in market prices and labor flexibility.