Overview

This chapter characterizes production in a dynamic decision-making environment. The classic characterization of static firm decision making is contrasted with the dynamic decision environment where not all inputs are freely adjusted. The latter characterization is motivated by the conjecture that transaction costs are associated with adjusting the capital stock at a rapid rate per unit of time and these costs increase rapidly with the absolute rate of investment. In fact, these costs increase so rapidly that the firm may never attempt to achieve a jump in its capital stock at any given moment. Such transaction (or adjustment) costs have implications for the nature of the technology. This interplay is introduced in this chapter and serves as a foundation for the dynamic structure that follows throughout the book.