ECO204 Week 3 Discussion 1 Production in the Short Run

Class,

Distinguish between the short run and the long run. What will differentiate the short run and the long run?

      The short run is the “Period of time that is too short to vary all the inputs; one or more of the inputs must remain fixed,” the long run is “The period of time in which all inputs, including physical operations and equipment, can be varied” (Amacher & Pate, 2013, Ch. 7.4).  To distinguish between the two, a short-run decision focuses on maximizing profit using current physical capabilities, the long-run focuses on maximizing profit using the most physical locations and equipment possible (Amacher & Pate, 2013, Ch. 7.4).

Describe fixed inputs and variable inputs. Which inputs are fixed and which are variable in Sarah’s bakery?

          Inputs are based on production functions within a firm, it describes the amount of outputs from a various combination of inputs.  Fixed inputs are “The productive resources that cannot be varied in the short run, such as the size of the plant,” variable inputs are “The productive resources that can be increased or decreased in the short run” (Amacher & Pate, 2013, Ch. 7.4)  In Sarah’s case, the bakery and oven are fixed variables for calculating the short run; labor would be considered the variable input.

Why would marginal productivity decline after a certain level of production?

          “As more and more units of a variable input are added to a set of fixed inputs, the resulting additions to output will eventually become smaller. This economic conclusion is referred to as the principle of diminishing returns” (Amacher & Pate, 2013, Ch. 7.4).  This means that as more inputs are added overtime, the output result keeps decreasing, this is proven through the equation of finding the “Marginal Product (MP),” which calculates “Change in total output that is produced by a unit change in an input. The marginal product of labor, for example, is the change in total output per unit change in the use of labor services” (Amacher & Pate, 2013, Ch. 7.4).

How can this problem of diminishing returns or marginal productivity be reduced or removed?

               This problem can be solved by using variants of a function method called an “Isoquant”.  Assuming there are two input variables being calculated, they can be put into this equation to find the difference in output when one input is changed.  However, it only calculates for one of the factors, the other must consider the total cost available to exchange inputs with.  When utilizing price affect to the isocost line, you can find the best combination of the two variable inputs to figure out the best outcome to solve diminishing returns (Amacher & Pate, 2013, Ch. 7.5).

Resources

Amacher, R., & Pate, J. (2013). Microeconomics Principles and Policies. San Diego, California:       Bridgepoint Education, Inc.