Economics 1021A/B Chapter 11: Chapter 11 reading

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The firm makes many decisions to achieve its main objective: (economic) profit maximization. All decisions can be placed in two time frames: November 5, 2016: the short run, the long run. To produce more output (product) in the short run, the firm must: Which means that it must increase its costs. Product curves: graphs of the relationships between employment and the three product concepts. The total product curve shows how total product changes with the quantity of labour employed. Average product curve: the figure shows the average product of labour and the connection between average product and marginal product. With 1 worker, marginal product exceeds average product, so average product is increasing. With 2 workers, marginal product equals average product, so average product is at its maximum. With more than 2 workers, marginal product is less than average product, so average product is decreasing.

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11. [3 Marks] Assume no change in the LRATC.? All firms in a perfectly competitive market have access to the same technology and input prices. Production entails a $1000 per period fixed cost. A firm sells 1000 units a price of $10, incurring an average of $8 per unit in variable costs. A. The firm must increase output to increase short-run profits. B. The firm must decrease output to increase short-run profits. C. Assuming this firm is maximizing short run profits, it will produce less in future periods as the market price will decrease in the long run. D. Assuming this firm is maximizing short run profits, it will produce more in future periods as the market price will increase in the long run. E. Assuming this firm is maximizing short run profits, it will continue to produce 1000 units in the long run.

Which of the following can a firm do in the long run but not in the short run:

1. Increase the size of its physical plant.

2. Reduce its rate of output by laying off workers.

3. Increase its variable costs.

4. Increases its use of raw material

yelloweagle292

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

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Economics 1021A/B Chapter 11: Chapter 11 reading

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