Economics
Short Run Production Decision
Short run production decision refers to the choices made by a firm regarding the quantity of inputs to use in the production process within a limited time frame. This decision is influenced by factors such as fixed costs, variable costs, and the firm's production capacity. It involves determining the optimal level of production to maximize profits or minimize losses in the short term.
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8 Key excerpts on "Short Run Production Decision"
eBook - PDFIntermediate Microeconomics
An Intuitive Approach with Calculus
- Thomas Nechyba(Author)
- 2018(Publication Date)
- Cengage Learning EMEA(Publisher)
Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 324 Production Decisions in the Short and Long Run Chapter 13 We continue with the example of a profit-maximizing producer producing door handles using labour and capital. A new government announces a new regulation which will increase the cost of employing workers. If capital is fixed in the short run, the producer now has to make decisions along a short-run production fron-tier that has output changing solely with the number of workers employed. As we have seen in Chapter 11, the producer will now employ fewer workers and produce fewer door handles. As time passes, the firm has a chance to make some more decisions because it will have the opportunity to change the amount of capital it is using and to re-evaluate whether it wants to employ more or fewer workers. Now both labour and capital can be adjusted to meet the new economic conditions in the labour market. The firm’s short-run problem is a slice of the more complex long-run problem they eventually face as time passes. Our focus now turns to how the firm will transition from the short run to the long run as underlying conditions change. We will ask how changes in the economic environment will affect the decisions by producers over time. By the economic environment, we will continue to mean the output and input prices that price-taking producers take as given as they try to do the best they can. In the short run, we will typically assume that capital is fixed and labour is variable, which mirrors an analysis where labour is fixed in the short run and capital is variable. We will begin to introduce a new type of fixed cost for firms, a cost that is not associ-ated with an input like labour or capital.
eBook - PDF- Rhona C. Free(Author)
- 2010(Publication Date)
- SAGE Publications, Inc(Publisher)
10 COSTS OF PRODUCTION Short Run and Long Run LAURENCE MINERS Fairfield University W hen most people other than economists think of costs, they may logically think about their household budget and the cost of heating their home or the cost of sending a daughter or son to college. Economists, however, are more apt to talk about the prices of these items and consider how households allocate a finite income to meet family needs. When economists con-sider costs, they refer most often to the production deci-sions of firms—what and how much they decide to produce, how they produce it, and how much it costs. The usual free-market assumption of profit-maximizing behav-ior by firms is not necessary for this discussion. All firms, from small local nonprofits, such as community libraries, to large international corporations attempt to operate effi-ciently. That is, they strive to produce the most output at the lowest possible cost. The purpose of this chapter is to consider the produc-tion decisions and associated costs that firms face. It should be clear at the outset that this discussion will be incomplete in that it will not consider the profitability of a firm or the particular market in which it operates. A firm may produce a safe, reliable product at minimum cost, using the best technology, but fail if there is insuffi-cient demand for its product. Similarly, an inefficient, lumbering, pollution-generating company may make sig-nificant profits if it dominates its industry and has a loyal following of customers. This is not meant to be seen as an endorsement of any particular industry structure. Rather, it is to point out that the costs and production decisions that firms make address only part of the economic sur-vival equation. One must also consider the demand for the firm's product and the market in which it operates.
eBook - PDF- Kumar, K Nirmal Ravi(Authors)
- 2021(Publication Date)
- Daya Publishing House(Publisher)
The concept of Returns to Scale (RTS) falls under long run production function. For example, while in the short run a farmer can increase its production by working extra hours, but in the long run, the farmer can decide to build and expand its production area to install capital-intensive machines and avoid overtime. Note that, the quantity of fixed inputs in a farm is a determining factor of the scale of operations. This scale of operations, in turn, determines the maximum production limit per unit of time that the farmer is capable of producing in the short run. Production can vary in the short run, by reducing or increasing the use of variable inputs in relation to the quantity of fixed inputs. In the long run, production can be increased or decreased by changing the scale of production of the farm, the technology used and the use of all or any of the inputs. This ebook is exclusively for this university only. Cannot be resold/distributed. Figure 1.6.1 : Concept of Period in a Production Programme. Whether or not an input is fixed or variable depends upon the time period involved. The longer the length of the time period under consideration, the more likely it is that the input will be variable and not fixed. Economists find it convenient to distinguish between the short run and the long run. Short run is the period in which, some of the firm’s inputs are fixed and long run is the period in which, all the firms’ inputs are variable. Thus, in the long run, input proportions can be varied considerably compared to short run. From the above discussion, it is clear that, a production function is an expression of quantitative (physical) relation between change in inputs and the resulting change in output. So, it is expressed as Y = f(X 1 , X 2 , X 3 , —, Xn). In microeconomic analysis, conventionally, we study the following two aspects of relation between inputs and output.
eBook - ePub- Israel M. Kirzner(Author)
- 2015(Publication Date)
- University of Chicago Press(Publisher)
By contrast, it seems appropriate to label as “short-run costs” those sacrifices which a producer sees himself as called upon to make (in order to achieve his product) when he finds himself already equipped with a factory. What makes these latter costs “short-run costs,” it will be observed, is not that the producer is not free to “vary” his factory. As Alchian has argued, there is nothing to stop the producer from altering his plant input. And, again, these are short-run costs not because of any pattern of expectations that happen to be held by the producer, but because, with a portion of the lengthy process of production already accomplished, the remaining distance until the final goal is that much shorter. 15 In fact, each stage at which decisions must be made during a long sequence of production decisions provides a different “run” of costs. The closer the decision is to the final output goal, the shorter the run of the relevant costs. Our interpretation of the distinction between costs of shorter and of longer run is not unrelated to the common usage (cited above under point 1) in which the term long run refers to a span of time sufficient for all adjustments to take effect. As a matter of empirical fact, it is likely that the earlier steps in the sequences of production decisions (such as the construction of plant) will be undertaken relatively infrequently—precisely because once a factory has been constructed, it represents a costlessly available resource. Thus the effect of a change in long-run costs, such as an increase in plant construction, will be felt in the market only as longer and longer periods of time are considered
- Berkeley Hill(Author)
- 2013(Publication Date)
- Pergamon(Publisher)
These were discussed in relation to the Theory of Supply (Chapter 3) and included the avoidance of risk, the prestige of the business and the personal preferences of the entre-preneur. For the sake of simplicity, however, Production Economics 120 Production Economics 121 assumes that the sole objective of production is the maximising of profits. Non-profit motives can be incorporated later.* The resources at a firm's disposal consist of its funds, which can be spent on machinery, buildings, raw materials, the hire of labour and land or factory space, and its entrepreneurship, or management. The entrepreneur must allocate and organise the other resources so that they are used in the best possible way — that is, so that the highest profit possible is generated from them. Production Economics is often called the Theory of the Firm because it attempts to explain the behaviour of profit-maximising firms and can be adequately described by modifying the general definition of economics given in Chapter 1 of this text. PRODUCTION ECONOMICS, OR THE THEORY OF THE FIRM, IS THE STUDY OF HOW FIRMS ALLOCATE THEIR SCARCE RE-SOURCES BETWEEN ALTERNATIVE USES IN THE PURSUIT OF PROFIT MAXIMISATION. QUESTIONS FACING THE ENTREPRENEUR In the pursuit of profit an entrepreneur will have to make three major decisions: (a) what to produce; (b) how to produce it and (c) how much to produce. To a large extent the resources he has at his disposal, including his own management preferences and abilities, will answer these questions for him. For example, a farmer with land, labour and a certain stock of machinery and access to a certain amount of borrowing from banks etc. will naturally not consider producing motor cars or television sets because he does not have the right types or quantities of resources required. He will only consider products lying within the range of his abilities and resources. Given time, the farmer could sell his land, stock, machinery etc.
eBook - PDFMicroeconomics
Theory and Applications
- Edgar K. Browning, Mark A. Zupan(Authors)
- 2019(Publication Date)
- Wiley(Publisher)
The key point is that some important input is not varied. Second, technology must remain unchanged. A change in technical know-how would cause the entire total product curve to shift. Production When All Inputs Are Variable: The Long Run By investigating the case where one input (capital) is fixed, the previous section was in fact focusing on the short-run output response by a firm. The short run is defined as a period of time in which changing the employment levels of some inputs is impractical. By contrast, the long run is a period of time in which the firm can vary all its inputs. A commercial real estate developer in Mumbai can acquire the additional land and building permits necessary to supply more office space. Samsung has sufficient time to expand its capacity to produce tablets. There are no fixed inputs in the long run; all inputs are variable inputs. Of course, the distinction between the short run and the long run is necessarily somewhat arbitrary. Six months may be ample time for the clothing industry to make a long-run adjust- ment to a change in prevailing fashions but insufficient time for the automobile industry to switch from production of large to small cars. Even for a given industry no specific time period can be identified as the short run since some inputs may be variable in three months, 7.3 short run a period of time in which changing the employment levels of some inputs is impractical long run a period of time in which the firm can vary all its inputs variable inputs all inputs in the long run The Law of Diminishing Marginal Returns, Caffeine Intake, and Exam Performance One of the world’s most commonly used drugs, caffeine, is a bitter, naturally occurring substance found in coffee and cocoa beans, tea leaves, kola nuts, and other plants. Caf- feine is ingested when consuming coffee, tea, soft drinks, or chocolate.
eBook - PDFMicroeconomics
A Global Text
- Judy Whitehead(Author)
- 2020(Publication Date)
- Routledge(Publisher)
Using mathematics to lend precision to the analysis, the technique of the calculus of variations is applied in order to determine the conditions for optimization (profit maximization). Since this technique works in terms of slopes and slopes of slopes (first-and second-order conditions), the results are expressed in terms of marginal (rates of change) variables. The basic tools include: • The short-run tools of the total, average and marginal product curves which are similar in concept to the total and marginal utility curves of the con-sumer and the total, average and marginal revenue curves used in demand analysis. • The long-run tools of the isoquant and isocost which are similar to the indifference curve and the budget line respectively of consumer analysis. In addition, there are tools such as the isocline and expenditure elasticity curves which are similar to the income–consumption curve and the Engel curve of consumer analysis. New tools introduced for production analysis include the Edgeworth box and the production possibility curve (product transformation curve) used in the analysis of the multi-product firm. 5.2 OPTIMIZING BEHAVIOUR IN THE SHORT-RUN As established earlier, in the short-run not all factors are variable. Usually capital ( K ), representing all overhead factors, is taken as fixed. Typically, labour ( L ), representing the operational inputs, is considered the only variable factor in the short-run. 125 C H A P T E R 5 THE PRODUCER AND OPTIMAL PRODUCTION CHOICES C H A P T E R 5 5.2.1 The short-run production function The short-run production function is usually written as: Q = f ( L ) K 1 This expresses output as a function of the variable input labour for a given level of the fixed factors represented by capital. 5.2.1.1 THE LAW OF VARIABLE PROPORTIONS The short-run production function is characterized by the operation of the law of variable proportions or the law of eventually diminishing returns to a variable factor.
eBook - ePubMicroeconomics: A Computational Approach
A Computational Approach
- Gerald E. Thompson(Author)
- 2016(Publication Date)
- Routledge(Publisher)
Diagram 4.1 . Three branches emanate from the decision point, each representing a different future time period. Focusing on each of the time periods essentially constitutes a separate course of action or “act.”Thus, a decision may be made for (1) the “Immediate Period” (top right of Diagram 4.1 ) when all resource inputs are fixed at their current levels; (2) the “Short Run” (middle right) where at least one but not all resource inputs may be varied in amount; or (3) the “Long Run” (bottom right) where all inputs may be varied in amount.Our earlier discussion focused on the immediate period where all inputs were fixed. The maximum total output was found to be 2 units using the (0,2) program—that is, nothing by Process 1 and 2 units by Process 2. As seen in Diagram 4.1 , this is recorded at the tip of the immediate-period branch at the top of the diagram.The second branch in Diagram 4.1 (middle right) represents the act of focusing on the short run where we assume one of the resources can be varied. It is Resource 2 (labor hours). Resource 1 (machine hours) remains fixed at 6 hours.At the tip of this branch we record eight different resource input combinations and the maximum output consequence of each combination. For this simple example, the maximum output program for each combination of the inputs can be obtained graphically, as in Figure 4.2 . The current Resource 2 input amount in Figure 4.2
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