Chapter 5:
Production in the short run and long run.
A firm is an institution that
hire factors and organizes them to produce and sell goods and services.The
firm’s goal is to maximize profit.If its fails to maximize profit it is either
eliminated or bought out by other firms.
SHORT RUN
A period of time over which one
or more factors of production remains fixed.Capital is fixed.Other resources
used by the firm such as labor can be changed in short run.Total product (TP)
which means The total output produced by the firm’s workers.Marginal product
(MP) means The addition total product after employing one more unit of factor
input.Marginal product of labor= change in total product ÷ change in units of
labor.Average product which means The average amount produced by each
unit.Average product of labor= total product÷ total units of labor.Law of
diminishing returns states that when additional units of a variable input are
added to fixed inputs, the marginal product of the variable input declines
beyond some point.
The relationship
between AVERAGE PRODUCT, MARGINAL PRODUCT AND TOATL PRODUCT.
· Marginal product is the slope
of the total product function. At point A, the slope of the total product is
the highest so marginal product is the highest. At point c, total product
maximum, the slope of the total product is zero. Marginal product intersects at
the horizontal axis.
Marginal product is the increase in total product as a result of adding one
more unit of input.(textbook definition.) Average product is the total product
(or total output) divided by the quantity of inputs used to produce that total.
(textbook definition.) Marginal product increases with the amount of workers
you have when making a product. For each new worker you add to help make a
product the amount of products you can make will increase by a fair amount but
as the amount of workers you hire the amount of products will tend to get less
and less. Until you come to the point where if you add one more worker the
amount of products you can make will get to the point where you won't be able
to put any more products out because the amount you produce will eventually be
non-existent. Marginal product will eventually start to experience diminishing
returns where the amount of products you will be able to produce will
eventually go down so far that you won't be able to put out anymore products.
When MP>AP AP will start to increase. When MP<AP AP will start to
decrease. Division of labor is when you divide the production process in to a
series of specialized tasks, each done by a different worker.(Textbook
definition.) The law of diminishing returns is when you keep adding more of a
variable input to a fixed input during the production process, the resulting
increase in output will at some point begin to diminish. (Textbook definition.)
·
LONG RUN
ΓΌ All factors are variable in long run.Firms can change the amount of
machines or office space they use.So, THE LAW OF DIMINISHING RETURNS does not
apply for long run.In short run firms have to decide how much to produce in the
current scale of plant but in long run firms have to choose among many potential
scales of plant.The scale of production:
Economics of
scale.
Explain the downsloping part
of long run curve.The factors are,Labor specialization.Hiring more workers
means jobs can be divided. Greater labor specialization eliminates the loss of
time that occurs whenever a worker shift from one task to another.Managerial
specialization. A supervisor who can handle 20 workers but in small plant have
to spend some of time on outside functions like finance. Greater productivity
and efficiency along with lower unit cost will be the result.Diseconomies of
scale. Difficulty of efficient controlling and coordinating a firm’s operation
as it becomes large scale producers.One person can assemble or digest
information in large scales must be delegated to many vice presidents.Constant
return to scale ATC is constant. Long run average cost does not change.
Economies of
scale, diseconomies of scale, and constant returns to scale are all related
terms that describe what happens as the scale of production increases. It is
important to understand the concepts of these returns to scale because they can
be an important factor in determining the optimal and equilibrium size of
firms. From that decision, the structure of industries and their prices and
output levels can also be determined appropriately. Therefore, these factors
provide major implications for public policy. Particularly, in case where they
lead to the development of natural monopolies, these companies can claim
themselves to be prevented from government attempts to break them up.
This term
characterizes a production process in which an increase in the number of units
produced causes a decrease in the average cost of each unit. It is also called
as increasing returns to scale as it refers to the situation in which the cost
of producing an additional unit of output, which is the marginal cost of a
product decreases as the volume of its production increases. It could also be
defined as the situation in which an equal percentage increase in all inputs
results in a greater percentage increase in output.
An example of an economy of scale would be the production of any established
manufacutred good would decrease with the increase in quantity produced due to
the cheaper procurement of the materials needed for production.
Constant returns to scale
It refers to a
technical property of production that examines changes in output subsequent a
proportional change in all inputs (where all inputs increase by a constant). If
output increases by that same proportional change then there are constant
returns to scale (CRTS), sometimes referred to simply as returns to scale.
Diseconomies of scale
A term used to
describe processes that do not conform to the definition of economies of scale
due to the costs for production does not decrease with the increased
production. This can happen for several reasons. First this can happen due to
the prodcution rates for the creation of parts for a product may take a set
amount of time therefore increasing production would still be dependent on that
part for completetion. The other reason diseconomies of scale can occur is from
the increased shipping costs due to distance or weight.
A good example of diseconomies of scale would be the phamacutical industry due
to their high research and development costs of producing a new drug.
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