Short-run production theory examines how output is affected by adding a variable factor of production, like labor, to fixed factors. Initially, marginal output increases due to specialization and division of labor. Eventually, marginal output decreases due to diminishing marginal returns, as the variable factor is added beyond the point where it yields high returns relative to the fixed factors.

1. Short run production theory

2. Factors of Production
What is production?
It is easiest to imagine the
production process as a factory
which turns inputs (the factors of
PRODUCT production) into outputs (a
product).
However, the theory of production also includes
businesses which simply trade (i.e. buy and sell) without
actually making anything, and businesses which deliver a
service as well as those which sell a tangible product. All
these businesses use land, labour and capital, with a dash
of entrepreneurial-ism, to meet a defined need, hopefully
at a profit!
Further more, these business enterprises can be privately
or state owned. So although we often use factory
examples, remember how broad the theory actually is.

3. The importance of time
And...
7. Short-run 8. Long-run
Revenue and costs in the short Revenue and costs are not
run are influenced by the restricted by factors of
factors of production available. production in the long run.
'Short-run' is defined as a 'Long run' is defined as a period
period within which at least one over which all the factors of
factor of production is fixed. production can change.
If we run a factory (or coffee shop, hospital, airline, etc.) time makes a big difference to
how we think about production. In the short-run, we are limited in what we produce by
the size of our factory and the equipment we own. We can employ new workers fairly
easily, and buy more materials, but there is only so much we can produce every day.
The question is “What is the optimal level of production?”
In the long-run anything is possible. We can raise finance and buy more factories, as
well as employing more workers and buying more materials. The question then
becomes “What is the optimal scale of production?”

4. The optimal level of production
When one person makes a
product they have to do
everything, from start to finish.
When two people share the
Adam Smith's pin factory
work they can divide up the
tasks and begin to specialise in Over 200 years ago, Adam Smith argued
certain aspects of production. that the production of a simple pin
could be shared amongst many
As more people are employed workers.
in production the job of making
the product can be broken “One man draws out the wire, another
straights it, a third cuts it, a fourth
down into more and more points it, a fifth grinds it at the top for
specialised tasks. You may be receiving the pin head. The business
surprised just how many stages of making a pin is divided into about
there are to the production of eighteen distinct operations.”
even the simplest of products.

5. How does specialisation improve productivity?
The division of labour, as Adam
Smith called it, could significantly
increase the output of a firm in
three ways: How significant is the division of
labour?
II. The increase in 'dexterity' of each
“A workman not educated in the business
worker of pin making could scarce, perhaps,
with his utmost industry, make one pin
III.The saved time by avoiding in a day... Ten persons could make
moving from one job to another among them upwards of forty-eight
thousand pins in a day. Each person,
IV.The invention of machines which therefore, making a tenth part of forty-
could perform the simple tasks in eight thousand pins, might be
place of workers considered as making four thousand
eight hundred pins in a day.”
The application of these ideas has
revolutionised production and
dramatically increased our wealth
and standard of living.

6. Toasters and the modern economy
How far has the concept of division
of labour taken us? Thomas
Thwaites has the answer.
Thomas asked himself, how
hard could it be for one man to
build a toaster, from scratch?
One factory can turn out
hundreds, if not thousands, of
toasters every day. How much
greater is this than what one
man could do alone, without the
benefit of the division of labour?
http://www.ted.com/talks/thomas_thwaites_how_i_built_a_toaster_from_scrat

7. Strawberry’s and specialisation
If you have ever been strawberry picking you will know that you need
one field of strawberries, one basket and a lot of effort.
How many 'distinct operations' can the process of picking strawberries
be divided into?

Include everything from finding the ripe strawberries through to
weighing and packing them

Think about what equipment you could use

8. Handling production data
No. of workers 0 1 2 3 4 5 6 7 8 9
(fixed capital)
Total output, 0 1 4 9 16 25 32 35 36 34
product or returns
Average output, - 1
product or returns
Marginal output, 1 3
product or returns
Here we have some data which shows the total output of a firm in the short run as it
employs more labour to work in its factory. By calculating the average output per worker
we can see the effects of increased productivity due to specialisation. The marginal
output is the amount added to total output as each additional worker is added.
Fill in the missing data for average and marginal output.

9. Short-run production theory
No. of workers 0 1 2 3 4 5 6 7 8 9
(fixed capital)
Total output, 0 1 4 9 16 25 32 35 36 34
product or returns
Average output, - 1 2 3 4 5 5.3 5 4.5 3.8
product or returns
Marginal output, 1 3 5 7 9 7 3 1 -2
product or returns
What happens to average and marginal output as more workers are employed?
Why?
Plot the total output on one graph and the average and marginal output on another
graph.

10. Product curves
We can see the effect of the
division of labour in these
curves as total, average and
marginal product rises.
However, we also see something
strange happening. As more
workers are employed the
increase in total product begins
to slow, then actually falls as
the ninth worker is employed.
The marginal product curve
shows that the ninth worker has
a negative marginal output... by
increasing workers to this level
the firm actually produces less.
What is going on?

11. The law of diminishing marginal returns
This law states that as a variable
factor of production is added to
fixed factors, eventually the
marginal returns (or marginal
product) of the variable factor
will begin to fall.
Imagine our strawberry pickers. As more
workers are employed the total output (no.
of strawberries picked) increases, but so
does the marginal output as each worker
makes the operation more productive.
However, the filed is only so big and can
only yield so many strawberries. As the
number of workers increases further the
marginal product falls. Workers get in
each others way and reduce each others'
productivity.

12. Drawing the marginal and average product curves
Note the relationship between the
marginal and average product
curves:

When marginal > average
product the average rises

When marginal < average
product the average falls

When marginal = average the
average is constant
In other words, the marginal
product curve crosses the
average product curve at its
highest point.

13. Summary

Short-run production theory attempts to explain
what happens to output as a variable factor is
added to fixed factor/s of production

As a variable factor of production is added to
fixed factor/s the marginal output increases at
first due to the effects of specialisation and the
division of labour

As the variable factor continues to be added the
marginal product eventually falls due to
diminishing marginal returns