Short Run and Long Run

A2 Markets & Market Systems Short trial prolong and wide Run carrefourion As part of our introduction to the theory of the firm, we first consume the nature of takings of different goods and services in the before long and abundant run. The model of a employment functionThe mathematical growthion function is a numeric expression which relates the quantity of promoter commentarys to the quantity of fruits that result. We deliver use of collar bank bills of cropion / productivity. * Total product is simply the land outfit that is generated from the factors of production apply by a work.In most manufacturing industries such as force vehicles, freezers and DVD players, it is straightforward to measure the volume of production from promote and hood inputs that atomic number 18 used. But in many service or knowledge-based industries, where a great deal(prenominal) of the output is intangible or perhaps weightless(prenominal) we find it harder to measure pr oductivity * Average product is the total output divided by the number of units of the variable factor of production employed (e. g. utput per doer employed or output per unit of slap-up employed) * Marginal product is the diverge in total product when an additional unit of the variable factor of production is employed. For example marginal product would measure the transfigure in output that comes from increase the employment of moil by one person, or by adding one more machine to the production process in the short run. The Short Run Production FunctionThe short run is delimitate in economics as a period of time where at least one factor of production is assumed to be in fixed supply i. e. it cannot be tackd.We normally assume that the quantity of peachy inputs (e. g. plant and machinery) is fixed and that production can be altered by suppliers through changing the demand for variable inputs such as labour, components, warm materials and energy inputs. Often the amount of write down available for production is excessively fixed. The time periods used in textbook economics are more or less arbitrary because they differ from industry to industry. The short run for the electricity extension industry or the telecommunications sector varies from that appropriate for newspaper and magazine issue and small- outdo production of foodstuffs and beverages.Much depends on the time scale that permits a patronage to alter all of the inputs that it can bring to production. In the short run, the impartiality of fall returns states that as we add more units of a variable input (i. e. labour or raw materials) to fixed amounts of land and capital, the change in total output go away at first rise and whence fall. Diminishing returns to labour occurs when marginal product of labour starts to fall. This subject matter that total output will still be rising but increasing at a decreasing rate as more workers are employed.As we shall tell in the following nume rical example, eventually a step-down in marginal product leads to a fall in second-rate product. What happens to marginal product is linked directly to the productivity of each unembellished worker employed. At low levels of labour input, the fixed factors of production land and capital, tend to be under-utilised which means that each additional worker will have plenty of capital to use and, as a result, marginal product may rise.Beyond a certain crown however, the fixed factors of production become scarcer and new workers will not have as much capital to work with so that the capital input becomes diluted among a larger workforce. As a result, the marginal productivity of each worker tends to fall this is known as the principle of diminishing returns. An example of the conception of diminishing returns is shown below. We assume that there is a fixed supply of capital (e. g. 20 units) available in the production process to which extra units of labour are added from one per son through to eleven. Initially the marginal product of labour is rising. * It peaks when the sixth worked is employed when the marginal product is 29. * Marginal product and so starts to fall. Total output is still increasing as we add more labour, but at a slower rate. At this point the short run production demonstrates diminishing returns. The Law of Diminishing Returns roof Input Labour Input Total Output Marginal Product Average Product of Labour 20 1 5 5 20 2 16 11 8 20 3 30 14 10 20 4 56 26 14 20 5 85 28 17 20 6 114 29 19 20 7 140 26 20 0 8 160 20 20 20 9 171 11 19 20 10 180 9 18 20 11 187 7 17 Average product will continue to rise as long as the marginal product is greater than the average for example when the seventh worker is added the marginal gain in output is 26 and this drags the average up from 19 to 20 units. Once marginal product is below the average as it is with the ninth worker employed (where marginal product is only 11) then the average will decline. This marginal-average relationship is important to understanding the nature of short run cost curves.It is worth going through this again to make sure that you understand it. Criticisms of the Law of Diminishing ReturnsHow realistic is this notion of diminishing returns? Surely ambitious and successful businesses do what they can to avoid such a problem emerging. It is now widely recognised that the effects of globalisation, and in particular the ability of trans-national corporations to source their factor inputs from more than one surface area and engage in rapid transfers of business technology and other information, makes the concept of diminishing returns less relevant in the real world of business.You may have read about the expansion of out-sourcing as a means for a business to cut their costs and make their production processes as flexible as possible. In many industries as a business expands, it is more likely to experience increasing returns. After all, why should a multinati onal business spend huge sums on expensive look and development and investment in capital machinery if a business cannot survival of the fittest increasing returns and lower unit costs of production from these extra inputs? Long run production returns to scaleIn the long run, all factors of production are variable.How the output of a business responds to a change in factor inputs is called returns to scale. * increase returns to scale occur when the % change in output % change in inputs * Decreasing returns to scale occur when the % change in output % change in inputs * Constant returns to scale occur when the % change in output = % change in inputs * A numerical example of long run returns to scale Units of Capital Units of Labour Total Output % Change in Inputs % Change in Output Returns to Scale 20 150 3000 0 300 7500 100 150 Increasing 60 450 12000 50 60 Increasing 80 600 16000 33 33 Constant 100 750 18000 25 13 Decreasing In the example above, we increase the inputs of capital and labour by the same proportion each time. We then compare the % change in output that comes from a given % change in inputs. * In our example when we double the factor inputs from (150L + 20K) to (300L + 40K) then the percentage change in output is 150% there are increasing returns to scale. In contrast, when the scale of production is changed from (600L + 80K0 to (750L + 100K) then the percentage change in output (13%) is less than the change in inputs (25%) implying a situation of decreasing returns to scale. As we shall see a later, the nature of the returns to scale affects the shape of a businesss long run average cost curve. The effect of an increase in labour productivity at all levels of employment Productivity may have been increased through the effects of technological change modify incentives better management or the effects of work-related training which boosts the skills of the employed labour force.