LS 10 - CHAPTER 10 Output and Costs Decision Time Frames...

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1 Output and Costs CHAPTER 10 Decision Time Frames The firm makes many decisions to achieve its main objective: profit maximization . Some decisions are critical to the survival of the firm. Some decisions are irreversible (or very costly to reverse). Other decisions are easily reversed and are less critical to the survival of the firm, but still influence profit. All decisions can be placed in two time frames: ± The short run ± The long run Decision Time Frames The Short Run The short run is a time frame in which the quantity of one or more resources used in production is fixed. For most firms, the capital, called the firm’s plant , is fixed in the short run. Other resources used by the firm (such as labor, raw materials, and energy) can be changed in the short run. Short-run decisions are easily reversed.
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2 Decision Time Frames The Long Run The long run is a time frame in which the quantities of all resources—including the plant size—can be varied. Long-run decisions are not easily reversed. A sunk cost is a cost incurred by the firm and cannot be changed. If a firm’s plant has no resale value, the amount paid for it is a sunk cost. Sunk costs are irrelevant to a firm’s decisions. Short-Run Technology Constraint To increase output in the short run, a firm must increase the amount of labor employed. Three concepts describe the relationship between output and the quantity of labor employed: 1. Total product 2. Marginal product 3. Average product Short-Run Technology Constraint Product Schedules Total product is the total output produced in a given period. The marginal product of labor is the change in total product that results from a one-unit increase in the quantity of labor employed, with all other inputs remaining the same. The average product of labor is equal to total product divided by the quantity of labor employed. Table 10.1 on page 221 shows a firm’s product schedules.
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3 Short-Run Technology Constraint Product Curves Product curves are graphs of the three product concepts that show how total product, marginal product, and average product change as the quantity of labor employed changes. Short-Run Technology Constraint Total Product Curve Figure 10.1 shows a total product curve. The total product curve shows how total product changes with the quantity of labor employed. Short-Run Technology Constraint The total product curve is similar to the PPF. It separates attainable output levels from unattainable output levels in the short run.
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4 Short-Run Technology Constraint Marginal Product Curve Figure 10.2 shows the marginal product of labor curve and how the marginal product curve relates to the total product curve. The first worker hired produces 4 units of output. Short-Run Technology Constraint The second worker hired produces 6 units of output and total product becomes 10 units.
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LS 10 - CHAPTER 10 Output and Costs Decision Time Frames...

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