Managerial Economics |
Assignment 3 Week 3 |
Yesenia Vazquez |
First, and for most one must describe the meaning behind short-run production. The short run is a time period where at least one factor of production is in fixed supply. A business has chosen its scale of production and must stick with this in the short run. We assume that the quantity of plant and machinery is fixed and that production can be altered by changing variable inputs such as labor, raw materials and energy. This leads us into the law of diminishing returns.
Keat and Young state, the law of diminishing returns states: as additional units of a variable input are combined with a fixed input, at some point the additional output starts to diminish. There are two key concerns to consider in regards to the law of diminishing returns in an actual business situation. “One, there is nothing in the law that states when diminish returns will start to take effect. The law merely says that if additional units of a variable input are combined with a fixed input, at some point, the marginal product of the input will start to diminish. Second, when economist fist stated this law, they made some very restrictive assumptions about the nature of the variable input being used; essentially, they assumed all inputs added to the production process were exactly the same in individual productivity” (Keat, P. & Young, P. 2009). If one thinks about it the law of diminishing returns only if one does trial and error and figures out how to best apply it.
There are three stages of production. Some of the key points are: economists use a variety of different terms in place of inputs and outputs: Inputs, outputs, factors, quantity, factor of production, total product, resources, and product. Second, in the short-run analysis of the production function there are a few other terms that are used as well; such as marginal product, average product, and total product. “In other words, the marginal product can be defined as the change in output or total product resulting from a unit change in a variable input, and the average product can be defined as the total product per unit of input used” (Keat, P. & Young, P. 2009). The significance of each stage of production is simple. Stage I runs to where the