Econometrica: Apr 1955, Volume 23, Issue 2
The Period of Production
J. D. SarganIn the theory of the firm under perfect competition a period which measures the effect of the rate of interest on relative prices of inputs and outputs should be called the period of production. Alternatively, this period can be defined as the difference between an output period and an input period, each with respect to the plans of a marginal entrepreneur about to start a new firm. The output period is the weighted mean of times to future sales; similarly, the input period is the weighted mean of times to future purchases. The value of the period of production is considered here for certain simple cases where it can be simply related to the average periods of the capital goods being used. These results provide approximations for more realistic cases where the average period of a capital good is less easily defined. Subsequently we examine the variations in this period of production when the rate of interest changes. If the results are applied to an economy in which each firm produces only one commodity, the complete period of production can then be defined for each commodity, and this determines the effect of changes in the rate of interest on the ratio of the price of this commodity to an index of prices of the primary factors of production, labour and land. Finally, some rough calculations are made to estimate the order of magnitudes of actual complete periods of production.
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