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ECO3041 - Ch 5 Supply Decision

# ECO3041 - Ch 5 Supply Decision - Chapter 5 Notes Chapter 5...

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Chapter 5 Notes Chapter 5 Supply Decision I Capacity constraint: the production function Short-Run Short run (SR) – It’s the time frame in which the quantities of some resources are fixed. In the SR a firm can usually change the quantity of labor it uses but not its technology and quantity of capital. We usually define SR as a period less than 365 days. Long run – It is the time frame in which the quantities of all resources can be varied. We usually define SR as a period more than 365 days. An easy way to differentiate SR from LR is to determine how long the product in question last. At the extreme, an apple last a very short time, and therefore it is must have a sort duration. Vice versa, a house takes much longer to degrade, and it has a LR duration. When speaking of production, hiring and firing takes less than one year to accomplish. Thus “Labor” is a SR factor of production. On the other hand, building a factory takes longer than one year to complete; therefore, capital is a LR factor of production. Short-Run Production We describe the relationship between output and the Q L employed by using three related concepts: Total product Marginal product Average product Total Product (TP) Total product – It is the total quantity of good produced in a given period. Total product increases as the Q L increases at a decreasing return to scale (DRS). Total product schedule shows how the Q of a good changes and the labor input changes. Total product curve graphs the data in a product schedule. All points inside the bell- shape are attainable, and all those that are above are unattainable. 1 | P a g e

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Chapter 5 Notes Marginal Product (MP) Marginal product – It is the change in total product that results from a one-unit increase in the quantity of labor employed. It tells us the contribution to TP if an additional worker is hired. Contribution may increase: Increasing Return to Scale (IRS), Contribution may stay the same: Constant Return to Scale (CRS), or Contribution may decrease: Decreasing Return to Scale (DRS), MP is calculated as follows: MP = ∆ TP ÷ ∆Q L This relationship shows that at the start the MP increases. However as more and more workers are hired, the additional employees produce less and less. Eventually we hire too many employees and then production decreases altogether.
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