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Short run is a time frame in which quantity of at least one factor of production is fixed

For most capital and land and investment are fixed factors and variable factors is labourFirms plant is the fixed factor of production

Fixed factors for Electricity Company are:o Building, generator and control system along with computers

In the short run to increase output you should increase quantity of variables, in our Electricity

Company the variable quantity is labour.

Short run decision are easily reversed in order to increase output we should introduce more

variables, and in order to decrease output we should take off some variable.

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Long run is a time frame in which the quantities of all factors can be varied. In other ward, fixed cost

for the company fixed factors can be easily variable cost in a period of time.

In our Electricity Company the company can decide to install more generators or reorganize its

management team as well as employing more labours.

Long run decisions are not easily reversed; one the company decide to buy more generators, the

firm must live with the decision for some time.

Sunk cost is the cost of past expenditure that has no resale value.

The decision its influenced by;

Short run cost of changing the quantity of labour Long run cost of changing its plant Not the SUNK COS

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Short run Technology Constraint (barriers)

The relationships between output & the quantity of labour employed can be found by using three

related concepts:

Total product Marginal product Average product

The 3 concepts can be shown by either product schedule or product curves

Product schedule

Total product is the MAX output that a given quantity (labour) can produce

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Marginal product of labour is the increase in total product resulting from 1 unite increase in the

quantity (labour) with all other inputs remain fixed.

Marginal product = outputs produced by labour 2 outputs produced by labour 2

Average product = total product produced / number of labour employed (work in the production

line)

Product Curves

Total product curve see the note

Increasing marginal return see the note

Diminishing Marginal returns its when the marginal product of additional worker is less than the

previous worker

Its happened because of the fact that more and more workers are using the same capital andmachinery.

The law of diminishing returns state that as the firm uses more of a variable factor of production

(labours) with a given quantity of the fixed factor of production (machinery) the marginal product of

the variable factor eventually diminishes.

Review quiz:

Explain how marginal product of labour and the average product of labour changes as the quantity

increases initially and eventually?

Initially the average product of labour will start to rise as well as marginal product of labour till they

become equal at the MAX point of average product then with introducing more labour average

product will start to fall as well as marginal product till the marginal product reach its diminishing

returns where the output produced by the additional labour introduced is less than the previous

labour.

Whats the law of diminishing returns state, and why does the marginal product diminish?

It estate as the firm introduced more and more labours with the given quantity of the fixed factor of

production, the marginal product of the variable factor will eventually diminish

Why, because more and more labours are using the same capital and machinery which lead into

reducing the working hours for each worker.

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Short run cost

The relationship between outputs and cost can be shown by using 3 concepts

Total cost is the cost of all the factors of production it uses

Total cost = total variable cost + total fixed cost

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Total fixed costits the cost of the firms fixed factors

Total variable cost is the cost of the firms variable inputs

Total variables changes as total product changeMarginal cost is the change in total cost resulting from a one unit increase in output

Marginal cost = change in total cost/ change in output

Marginal cost decrease at a low outputs then will start to increase as more worker introduced ( the

law of diminishing returns stated that each additional worker produces a successfully smaller

addition to output ) which lead into an increase of marginal cost

Average cost is cost per unit of outputs

Average fixed cost = total fixed cost/quantity

Average variable cost =total variable cost / quantity

Average total cost = average variable cost + average fixed cost (see the note 4 the graph)