Production refers to the output of goods and services produced by businesses within a market.
This production creates the supply that allows our needs and wants to be satisfied. To simplify
the idea of the production function, economists create a number of time periods for analysis.
Short run production: The short run is a period of time when there is at least one fixed factor
input. This is usually the capital input such as plant and machinery and the stock of buildings
and technology. In the short run, the output of a business expands when more variable factors of
production (e.g. labour, raw materials and components) are employed.
Long run production: In the long run, all of the factors of production can change giving a
business the opportunity to increase the scale of its operations. For example a business may
grow by adding extra labour and capital to the production process and introducing new
technology into their operations.
The length of time between the short and the long run will vary from industry to industry. For
example, how long would it take a newly created business delivering sandwiches around a local
town to move from the short to the long run? Let us assume that the business starts off with
leased premises to make the sandwiches; two leased vehicles for deliveries and five full-time and
part-time staff. In the short run, they can increase production by using more raw materials and by
bringing in extra staff as required. But if demand grows, it wont take the business long to
perhaps lease another larger building, buy in some more capital equipment and also lease some
extra delivery vans – by the time it has done this, it has already moved into the long run.
The point is that for some businesses the long run can be a matter of weeks! Whereas for
industries that requires very expensive capital equipment which may take several months or
perhaps years to become available, then the long run can be a sizeable period of time.
The meaning of productivity
When economists and government ministers talk about productivity they are referring to how
productive labour is. But productivity is also about other inputs. So, for example, a company
could increase productivity by investing in new machinery which embodies the latest technological progress, and which reduces the number of workers required to produce the same
amount of output. The government’s objective is to improve labour and capital productivity in
the British economy in order to improve the supply-side potential of the country.
Productivity of the variable factor labour and the law of diminishing returns
In the example of productivity given below, the labour input is assumed to be the only variable
factor by a firm. Other factor inputs such as capital are assumed to be fixed in supply. The
“returns” to adding more labour to the production process are measured in two ways:
Marginal product (MP) = Change in total output from adding one extra unit of
Average product (