The Short Run

The short run is that period of time in which at least one factor of production is fixed. All production takes place in the short run (applying more of the variable factors (labour for example) to the fixed factor (capital, land)).

The long run is that period of time in which all factors of production are variable, but the state of technology is fixed. All planning takes place in the long run. (In your head).

If a firm wishes to increase output, they may only do so by applying more units of the variable factors to the fixed factors.

Often the fixed factor is some element of capital, but this is not always the case (for example a type of highly skilled labour such as specialist machine operator, or a circle ball marker...).

The length of the short run will be determined by the time it takes to increase the quantity of the fixed factor. (It will vary from industry to industry).

Call centres, digging holes, internet based...

Nuclear power

As the quantity of labour increases, the rate of output (TP) increases. TP rises with input, first at an increasing rate and then at a decreasing rate.

Average Product is found by dividing the total product by the amount of labour required to produce that product. AP increases and then decreases as input increases. The marginal curve intersects the average product at its highest point.

Marginal Product is shown between the rows because it refers to the change in output from one level of labour input to another. Marginal product increases and then decreases as input decreases. MP intersects the average product curve at its highest point.

The hypothesis of eventually diminishing marginal returns: As extra units of a variable are added to a given quantity of a fixed factor, the output from each additional unit of the variable factor will eventually diminish. (MP curve).

The hypothesis of eventually diminishing average returns: As extra units of a variable factor are added to a given quantity of a fixed factor, the output per unit of the variable factor will eventually diminish. (AP curve).

y-axis = Output x-axis = Variable Factor MP curve intersects the AP curve at its highest point (the point of diminishing average return.) The highest point of the MP curve is called the point pf diminishing marginal return.

y-axis = Output x-axis = Variable Factor The TP curve increases and then stagnates.

Fixed costs remain the same no matter how much is produced (rent, repayment of loans, maintenance and insurance). TFC = number of fixed factors x price per factor = F X C = k (constant)

Variable costs vary with output (wages, raw materials). TVC = number of variable factors x cost per factor = V x C TVC rises with output, first at a reducing rate and then at an increasing rate.

Total Cost = Total Fixed Cost + Total Variable Cost (TFC + TVC) Total cost rises with input, first at a reducing rate and then at an increasing rate.

Average fixed cost decreases as output rises. Average Fixed Cost = Total Fixed Cost / Output

AVC falls at first, as output increases but then increases as output increases. AVC = TVC / q = Total Variable Cost / Output

Average total cost decreases and then increases as output increases. ATC = AFC + AVC = TC / q = TFC / q + TVC / q

The gap between the average total cost and the average variable cost curve is average fixed costs, which is why the gap gets smaller as output increases.

Marginal costs decreases and then increases as output increases. MC intersects the AVC and ATC curves at their lowest prices. MC = Change in TC / Change in q (output).

The minimum point of the ATC curve. It is the most efficient point of output. Producing beyond the capacity is inefficient.

x-axis = Costs x-axis = Output Straight line, intersects the y-axis on the TFC curve.

x-axis = Costs x-axis = Output Straight line, passes through the origin, 0.

x-axis = Costs x-axis = Output Horizontal line, y = total price of fixed factors

The difference between the ATC curve and the AVC curve is the AFC, the difference decreases as the output increases.

x-axis = Costs x-axis = Output

The lowest points of ATC and AVC are intersected by the MC curve. ATC's lowest point is the capacity output, producing beyond that point is inefficient.