Like any other unit, a firm is also limited by the technology available. Thus, it can increase its outputs only by increasing its inputs. As usual, this will be expressed by a production function. The output that a firm can produce depends on the land, labor and capital the firm puts to work.
In formulating the neoclassical theory of a firm, John Bates Clark took over the classical categories of land, labor and capital and simplified them in two ways. These are as follows:
1. He assumed that all labor is homogenous-- One labor hour is a perfect substitute for any other labor hour.
2. He ignored the distinction between land and capital, grouping together both kinds of non-human inputs under the general term “capital.” And he assumed that this broadened “capital” is homogenous.
Ofcourse, the simplifying assumptions are not true. John Bates Clark’s conception of a firm is highly simplified, like a map at a very large scale. In more advanced economics, one can get rid of the simplifying assumptions and deal with a much more realistic “map” of a business firm.
In the John Bates Clark model, there are some important differences between labor and capital and they relate to the long and short-run.
In formulating the neoclassical theory of a firm, John Bates Clark took over the classical categories of land, labor and capital and simplified them in two ways. These are as follows:
1. He assumed that all labor is homogenous-- One labor hour is a perfect substitute for any other labor hour.
2. He ignored the distinction between land and capital, grouping together both kinds of non-human inputs under the general term “capital.” And he assumed that this broadened “capital” is homogenous.
Ofcourse, the simplifying assumptions are not true. John Bates Clark’s conception of a firm is highly simplified, like a map at a very large scale. In more advanced economics, one can get rid of the simplifying assumptions and deal with a much more realistic “map” of a business firm.
In the John Bates Clark model, there are some important differences between labor and capital and they relate to the long and short-run.
