Output and Costs Rabia Khan Syed Abdul Haseeb Abdul Wahid Khan
Time frames The two major types are: Short-run Long-run
Short-run time frame A time frame in which the quantities of some resources are fixed (Technology, building and capital) A “plant” is a collection of fixed resources of the firm For short run time frames increasing the quantity of variable inputs increases the output of the firm. (e.gLabour) As the term implies it is easily reversible.
Long-run time frame A time frame in which the quantities of all the resources can be varied. Therefore the firm’s plant is changed, and so it is relatively harder to reverse long run decisions.
Sunk costs The past cost of buying a plant without any resale value is known as a sunk cost, the sunk cost does not influence the firm’s decisions. Short run and long run costs, however do.
Short run technology constraints Total product Marginal product Average product Product schedules and product curves help illustrate these concepts.
The following table explains how total, average and marginal costs are displayed.
Total Product Curve This is a total product curve. The total product curve is similar to the PPF. It separates attainable output levels from unattainable output levels in the short run.
Marginal Product Curve It 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 The second worker hired produces 6 units of output and total product becomes 10 units, so on …
To make a graph of the marginal product of labor, we can stack the bars in the previous graph side by side. The marginal product of labor curve passes through the mid-points of these bars. This gives us Increasing marginal returns initially Diminishing marginal returns eventually
Average Product Curve shows the average product curve and its relationship with the marginal product curve. When marginal product exceeds average product, average product increases When marginal product is below average product, average product decreases When marginal product equals average product, average product is at its maximum
Short-run Costs This curve shows ; Marginal Cost Average Total Cost Average Variable Cost Average Fixed Cost
Economies and Diseconomies of scale
Constant returns to scale Features of a firm’s technology that lead to constant long-run average cost as output increases. Therefore in this case the Long-run average cost curve will be a horizontal straight line. This would mean for a certain increase in input let’s say “x” the increase in output would be “x” as well.
Minimum efficient scale At a certain point in the Long-run average cost curve, the smallest quantity of output where the cost is at it’s lowest level. It is efficient for the firm to balance it’s output and costs at this level, since a low cost is offering a fairly high output.