In this lesson, you will learn how a firm’s production choices change between the short run and the long run. This distinction matters because a firm can adjust its output in different ways depending on whether it can change only labor or can also change capital.
A firm uses inputs such as labor and capital to produce output. In the short run, at least one factor of production is fixed. In the typing-firm example, labor consists of typists and capital consists of personal computers. If the firm has only one PC, it can increase its labor input by hiring more typists, but it cannot immediately increase the number of computers.
All flashcards
What is the difference between short-run and long-run production?
In the short run, at least one factor of production is fixed. In the long run, all factors—including labor and capital—can be varied.
What is marginal product?
Marginal product is the additional output generated by adding one more unit of an input, while holding other inputs constant.
What is diminishing marginal productivity?
It occurs when adding more of a variable input to a fixed amount of another input eventually yields smaller additions to output.
Why does labor’s marginal product decline when workers share one PC?
The PC is fixed and workers must share it. As more typists are added, each additional worker has less opportunity to use the computer productively.
How can additional capital affect the point at which marginal product diminishes?
More capital, such as additional PCs, gives more workers equipment to use. This can allow the firm to add more workers before marginal product begins to fall, though it may still diminish eventually.
Quiz questions
Which statement describes production in the long run?Answer: All factors, including labor and capital, can vary.
What does marginal product measure?Answer: The extra output from one more input unit, holding other inputs constant.
With one PC, output rises from 5 documents with one typist to 7 with two. What is the second typist’s marginal product?Answer: 2 documents per hour.
Why can adding workers to a firm with fixed equipment lead to smaller output gains?Answer: Workers share fixed equipment, so each added worker contributes less.
What effect can adding PCs have when a typing firm hires more typists?Answer: More typists can contribute before marginal product begins to diminish.
Based on Principles of Economics 3e by Steven A. Greenlaw, David Shapiro, Daniel MacDonald (OpenStax), licensed CC BY 4.0. Adapted into a summary, flashcards and quizzes.