SR_LR Supply

# SR_LR Supply - SR/LR Supply Curve 1 The Short Run and the...

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SR/LR Supply Curve 1

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2 The Short Run and the Long Run • Useful to categorize firms’ decisions into – Long-run decisions—involves a time horizon long enough for a firm to vary all of its inputs – Short-run decisions—involves any time horizon over which at least one of the firm’s inputs cannot be varied • To guide the firm over the next several years – Manager must use the long-run lens • To determine what the firm should do next week – Short run lens is best
3 Production in the Short Run When firms make short-run decisions, there is nothing they can do about their fixed inputs – Stuck with whatever quantity they have – However, can make choices about their variable inputs Fixed inputs – An input whose quantity must remain constant, regardless of how much output is produced Variable input – An input whose usage can change as the level of output changes Total product – Maximum quantity of output that can be produced from a given combination of inputs

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4 Production in the Short Run • Marginal product of labor (MPL) is the change in total product ( Δ Q) divided by the change in the number of workers hired ( Δ L) – Tells us the rise in output produced when one more worker is hired
5 Figure 4: Total and Marginal Product 30 90 130 161 184 196 Total Product Δ Q from hiring fourth worker Δ Q from hiring third worker Δ Q from hiring second worker Δ Q from hiring first worker increasing marginal returns diminishing marginal returns Units of Output Number of Workers 6 2 3 4 5 1

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6 Marginal Returns To Labor • As more and more workers are hired – MPL first increases – Then decreases • Pattern is believed to be typical at many types of firms
Increasing Marginal Returns to Labor • When the marginal product of labor increases as employment rises, we say there are increasing marginal returns to labor – Each time a worker is hired, total output rises by more than it did when the previous worker was hired

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## This note was uploaded on 02/17/2011 for the course ECON 011 taught by Professor Yezer during the Fall '07 term at GWU.

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SR_LR Supply - SR/LR Supply Curve 1 The Short Run and the...

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