7.2 Production in the Short Run
3 min read•june 24, 2024
Production in the short run focuses on how firms adjust output using while remain constant. This concept is crucial for understanding how businesses make decisions when faced with constraints and limited flexibility in their production processes.
The plays a key role in short-run production, explaining why productivity eventually declines as more variable are added. This principle helps managers determine optimal input levels and make efficient production choices.
Production in the Short Run
Components of production functions
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- Inputs are resources used to produce goods or services (labor, capital, raw materials, energy)
- are final goods or services produced by combining inputs
- Production functions describe relationships between quantities of inputs used and resulting outputs
- In short run, at least one input is fixed (capital) while others can vary (labor)
- typically written as , where:
- represents quantity of output
- represents variable input (labor)
- represents fixed input (capital)
Fixed vs variable inputs
- Fixed inputs cannot be changed in short run (land, buildings, machinery)
- Quantity of fixed inputs remains constant regardless of output level
- Variable inputs can be adjusted in short run (labor, raw materials, energy)
- Quantity of variable inputs can increase or decrease depending on desired output level
- In short run, firms can only change output by adjusting quantity of variable inputs
Changes in total and marginal product
- (TP) is total output produced using given amount of variable input, holding fixed inputs constant
- As variable input quantity increases, TP initially increases at increasing rate, then at decreasing rate, eventually decreases
- (MP) is change in TP resulting from one-unit increase in variable input, holding fixed inputs constant
- MP initially increases as more variable input is used, reaches maximum, then declines
- (AP) is the total product divided by the number of units of variable input used
- Relationship between TP and MP divided into three stages:
- MP increases, TP increases at increasing rate
- MP decreases but remains positive, TP increases at decreasing rate
- MP becomes negative, TP decreases
Law of diminishing marginal returns
- States that as more units of variable input are added to fixed input, MP of variable input will eventually decrease
- Applies in short run when at least one input is fixed
- As firm increases variable input quantity, MP initially increases, reaches maximum, then decreases
- Decrease in MP occurs because fixed input becomes increasingly scarce relative to variable input
- Has important implications for short-run production decisions
- Firms should produce where MP is positive but decreasing (Stage 2 of production)
- Producing beyond point where MP becomes negative (Stage 3) is inefficient
Short-run vs long-run production decisions
- Short-run decisions involve adjusting variable inputs while fixed inputs remain constant
- Firms can only change output by varying variable input quantity
- Law of diminishing marginal returns applies in short run
- Long-run decisions involve adjusting all inputs, as no fixed inputs in long run
- Firms can change quantities of all inputs, including those fixed in short run
- Law of diminishing marginal returns does not apply in long run, as firms can vary input proportions
- In long run, firms have more flexibility to adjust production processes and can achieve
- Economies of scale occur when long-run average costs decrease as output increases
- Short-run production decisions more constrained than long-run decisions due to presence of fixed inputs
Production Analysis
- are curves that show different combinations of inputs that produce the same level of output
- describe how output changes as all inputs are increased proportionally in the long run
- refer to the ratio of inputs used in production, which can be adjusted in the long run to optimize efficiency
Key Terms to Review (15)
Average Product: Average product, also known as average physical product, is a measure of productivity that indicates the average output produced per unit of a variable input, such as labor, in the short run production process. It provides insight into the efficiency and productivity of the production process.
Economies of Scale: Economies of scale refer to the cost advantages that businesses can exploit by expanding their scale of production. As a company increases its output, its average costs per unit typically decrease due to more efficient utilization of resources, specialized equipment, and division of labor. This concept is central to understanding the production and cost structures of firms in various market structures.
Factor Proportions: Factor proportions refer to the relative quantities or combinations of different factors of production, such as labor, capital, and land, used in the production process. It is a fundamental concept in the theory of production and the study of how firms optimize their use of inputs to maximize output.
Fixed Inputs: Fixed inputs refer to the factors of production that cannot be easily or quickly changed in the short run. These inputs, such as machinery, equipment, and facilities, remain constant and do not fluctuate with changes in the level of production.
Inputs: Inputs refer to the resources or factors of production that are used in the process of creating goods or services. These inputs are the necessary components that go into the production process and are transformed into outputs or final products.
Isoquants: Isoquants are contour lines that represent all the different combinations of inputs that can produce the same level of output. They are a fundamental concept in the analysis of production and costs in economics, particularly in the context of production functions and the theory of the firm.
Law of Diminishing Marginal Returns: The law of diminishing marginal returns states that as additional units of a variable input (such as labor) are added to a fixed input (such as capital), the marginal output or benefit from each additional unit will eventually decrease, holding all other factors constant.
Marginal Product: Marginal product refers to the additional output or production that results from the addition of one more unit of a variable input, such as labor, while all other inputs remain constant. It is a crucial concept in understanding the relationship between inputs and outputs in the production process.
Outputs: Outputs refer to the final goods and services produced by a firm or economy during a specific period. They represent the end result of the production process and are the primary source of revenue and value creation for businesses and the overall economic system.
Production Function: The production function is a mathematical representation of the relationship between the inputs used in the production process and the maximum possible output that can be produced from those inputs. It describes the technical relationship between the factors of production and the quantity of output that can be produced.
Returns to Scale: Returns to scale refer to the changes in output that occur when a firm proportionally increases or decreases all inputs. It describes how a firm's output changes as the scale of production changes in the long run.
Short-Run Production Function: The short-run production function describes the relationship between the quantity of a good produced and the inputs used to produce that good, when at least one input is fixed. It illustrates how a firm can increase output by varying the levels of its variable inputs, such as labor and raw materials, while holding at least one input, typically capital, constant.
Stage of Production: The stage of production refers to the different phases or steps involved in the production process of a good or service. It encompasses the various activities and transformations that raw materials or inputs undergo to create the final product that is ready for consumption or distribution.
Total Product: Total product refers to the total quantity of output produced by a firm or an economy using a given set of inputs over a specific period of time. It is a fundamental concept in the study of production and the short-run production function, which examines how output changes as variable inputs are increased while at least one input is held constant.
Variable Inputs: Variable inputs refer to the factors of production that can be adjusted or changed in the short run to affect the level of output. These inputs are not fixed and can be increased or decreased as needed to meet production demands.