KEYNES-THE STATE OF L/T
EXPECTATION AND THE
THEORY OF EXPECTATIONS
Main Idea: Expectations as determining output and employment
In economics, the theory of rational expectations about the properties of the expectations and preferences of economic agents, which can be an individual, a social group, company or other market player with ability toinvest.
Production is done with the purpose of satisfying the consumer. The producer has to incur in several costs of producing and purchasing the material that will be used to produce and later on will be sold to the consumer. The problem is that the producer (or investor) has to determine both the amount of cost he is going to have on the purchase of the materials, as well as in the amount of timethat is going to have to be spend before finishing the product and selling it to the consumer. According to this, the producer or investor will have to form the best expectations possible in order to see the amount of money the consumer will be willing to pay for the product after the period of time has passed, so expectations will be the main determinant of the study, as they will be used as theguide to make things work correctly, eliminating all possible disruptions.
1) Make the best expectations possible before starting too produce and sell
2) Amount of time it will take
3) Cost of producing→ A price will be expected for the final output
Expectations will depend on two main groups:
The first main group will be, according to the expectations, the finalcost of what the producer is going to have to spend after purchasing the materials, process of production, machinery, labor… and deducing the whole process after it is finished. After deriving this cost, this will lead the producer to expect the price he will get, after deriving the cost when finishing the process of production and obtaining the final output.
The second group will be referred aswhat the producer, manufacturer or investor will earn after the product has been finished and sold to the customer, as this will be determine by the amount that the consumer will be willing to pay for this product, as this amount will have to compensate (in the medium or long term) to the entire cost of production and the whole process that has been accomplished before starting to sell the mainproduct.
With these two groups we derive long term and short term expectations, depending both on the process of production, and the time that will take for the process to be finish, and afterwards how long it will take to start selling the product that will be determined by the consumer. Expectations will determine: The daily behaviour of the firm on what to do (short term), selling proceeds,capital equipment, sales to distributors… but short term expectations will depend on long or medium term expectations, so economic agents and firms always look forward to the future, they try to predict logically final results, so they look to future expectations (medium and long run) before developing short term expectations.
If we now focus in the employment point of view we will see that theamount of employment that will be or will not be generated in the company will depend in these future expectations. The reason of this will be: 1) the results that the level of production generates, as well as the 2) amount of sales of output. Both of these factors will be able to modify expectations and with this, to determine the level of employment as one of the results.
We also find currentexpectations (short term), that will tell us the amount and types of output we are going to need daily or in a short period of time to be able to continue with our process of production.
An important factor to consider is that expectations do not change immediately from one day to another, so the employment rate wont be affected until a certain period of time in which we will be able to tell if we...