ECON 2010 Lecture Notes - Lecture 12: Marginal Product, Diminishing Returns, Isoquant

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raspberrymosquito490

22 Mar 2017

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Have to distinguish between short and long runs. If all or so(cid:373)e fa(cid:272)tors of produ(cid:272)tio(cid:374) are fixed a(cid:374)d (cid:272)a(cid:374)(cid:859)t (cid:271)e (cid:272)ha(cid:374)ged, this is a (cid:272)ase of a short run. In the short-run, the company only considers the amount of land and physical capital it has at the moment when making production decision. The company would produce more if it had more land and more buildings, but in the short-run the company has to use the available inputs. In other words, the short-run is a period where a firm can make limited decisions to alter the level of output. However, the adjustment is confined to a decision to increase or decrease output by increasing or decreasing the quantity of one factor, with everything else held constant. The factor that is viewed as variable in the short-run is the factor labour. As more labour is employed in the production of a particular commodity, the output level will increase within limits.

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Question:

Is it true that in a short-run production process, the marginal cost curve eventually slopes upward because firms have to pay workers a higher wage rate as they produce more output? Explain your answer.

Answer:

According to the definition of the short-run in Investopedia, the short-run, in economics, expresses the concept that an economy behaves differently depending on the length of time it has to react to certain stimuli. The short-run does not refer to a specific duration of time but rather is unique to the firm, industry, or economic variable being studied. A key principle guiding the concept of short-run and long-run is that in the short-run, firms face both variable and fixed costs, which means that output, wages and prices do not have full freedom to reach a new equilibrium. Most businesses make decisions not only about how many workers to employ at any given point in time (i.e. the amount of labor) but also about what scale of an operation (i.e. size of factory, office, etc.) to put together and what production processes to use. In contrast, economists often define the short-run as the time horizon over which the scale of operation is fixed and the only available business decision is the number of workers to employ. Technically, the short-run could also represent a situation where the amount of labor is fixed and the amount of capital is variable, but this is fairly uncommon. The logic is that even taking various labor laws as given, it's usually easier to hire and fire workers than it is to significantly change a major production process or move to a new size of factory or office. In the short-run, one factor of production is fixed, e.g. capital. This means that if a firm wants to increase output, it could employ more workers, but not increase capital in the short-run (it takes time to expand.) Therefore in the short-run, we can get diminishing marginal returns, and marginal costs may start to increase quickly. Also, in the short-run, we can see prices and wages out of equilibrium, e.g. sudden rise in demand, may lead to higher prices, but firms don't have the capacity to respond and increase supply.

Tejvan Pettinger. (2015). Short-run, long-run, very long-run. Glossary Terms. Economics help blog. NY: Helping to Simplify Economic.
Retrieved from: http://www.economicshelp.org/blog/glossary/short-run-long-run-very-long-run/
Short-Run. Short-Run Definition | Investopedia
Retrieved from http://www.investopedia.com/terms/s/shortrun.asp#ixzz4KO1YXsri

I need a peer reply for this, please.

taupeswan96

Another important concept for business owners is the idea of short-run and long-run decision making. In the short-run, at least one of the firm's factors of production is fixed. Generally, this is their capital. For many businesses, their building rent is considered the fixed cost since many business owners sign long-term lease agreements. In the long-run, everything in the business is considered a variable cost since firms can plan to expand or reduce operations in the long-run.

As a business owner/decision-maker, why do you think it is important to understand the difference between these two concepts? How does the business owner/decision-maker make choices for their firm in the two different time frames?

orchidsea-lion17

1. Theoretically, in a long-run cost function:

a. all inputs are fixed

b. all inputs are considered variable

c. some inputs are always fixed

d. capital and labor are always combined in fixed proportions

2. The short-run cost function is:

a. where all inputs to the production process are variable

b. relevant to decisions in which one or more inputs to the production process are fixed

c. not relevant to optimal pricing and production output decisions

d. crucial in making optimal investment decisions in new production facilities

3. Break-even analysis usually assumes all of the following except:

a. in the short run, there is no distinction between variable and fixed costs.

b. revenue and cost curves are straight-lines throughout the analysis.

c. there appears to be perfect competition since the price is considered to remain the same regardless of quantity

d. the straight-line cost curve implies that marginal cost is constant.

maroonllama628

ECON 2010 Lecture Notes - Lecture 12: Marginal Product, Diminishing Returns, Isoquant

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