Short-Run Production and Long-Run Production free essay sample

According to Sloman, (2004), production is the transformation of inputs into outputs by firms in order to earn profit. Production can be divided into two types, that is short-run production and long-run production. Production in the short-run is the production period of time over which at least one factor is fixed as production in the long-run is the production period of time long enough for all factors to be varied. As mentioned by Sloman, (2004), production in the short-run is subject to diminishing returns. The law of diminishing (marginal) return applies whereby there will be a point when each extra unit of the variable factor will produce less extra output than the previous unit when the increasing amount of a variable factor are used with a given amount of a fixed factor. For example, a fixed factor would be the factory as the variable factor would be labour. As the factory is a fixed factor, the output of the factory will only be increased if the number of employers employed is increased and as more and more workers are hired, the factory would become more crowded making it uncomfortable for the workers to produce at an optimal rate. We will write a custom essay sample on Short-Run Production and Long-Run Production or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page Thus, after a certain amount of workers hired, the production rate would then start to diminish. The opportunity cost is the cost of any activity measured in the expense of the firm. To apply the principle of opportunity cost to the firm, the factors of production it is using must be discovered and the sacrifice involved must be measured. Factors of the firm’s production can be divided into to categories. Explicit cost, which costs are not owned by the firm. (Sloman, 2004) Explicit costs are the payments made to the factors of production to outside suppliers of inputs, namely rental for land, salary and wages for labour, bills and interests of capital. Implicit cost, which factors are already owned by the firm (Sloman, 2004). Implicit costs are cost which does not require payment inform of money to any third party but payment as the form of sacrifice of come other alternatives. Such examples of implicit cost of the firm are the opportunity lost by the firm when it decides to use the building it owns rather than to let it out to receive rental or the opportunity lost by the firm’s owner when he decides to start a company than to work under someone else with a stable income. In the short run production, there are 3 aspects of costs to be considered. (DBM CD) 1. Total Costs (TC) = Total fixed cost (TFC) + Total variable cost (TVC), which are the total cost of production as more units are being produced 2. Average Cost (AC) = TC/Quantity (Q), which are the costs which decreases as output increases; and rises again at a certain point 3. Marginal Cot (MC) = TCÂ ¬1-TC0/Q1-Q0, which changes as the output differs, initially decreasing than rising again. Graph1 Graph 2 As seen on Graph 1, the total fixed cost line is parallel to the quantity at a certain value of cost as the total variable cost line start from the value 0 of both quantity and total cost. Thus, total costs are the sum of the total fixed cost and the total variable cost. Even if the is no output, there would be a fixed cost, so the total cost of the firm at 0 output would only be the total fixed cost. As on graph 2, the AFC continuously falls as output rises. Applying the law of diminishing returns, both the MC and the ATC curve shows that the costs of production falls as quantity increases and rises up again at a certain point. This happens when the workforce necessary to produce a higher output is more compared to an optimal output by current workforce causing a hike in the MC and ATC. As mentioned above, production in the long run is the period of time that is enough to change the quantity of all fixed inputs, whereby all factors in of production are variable. Costs per unit Economies of ScaleConstant return to scaleDiseconomies of scale Qty of Output Graph extracted from DBM CD, page 43 In the section of economies of scale from the graph, it shows that the cost per unit for each output decreases as the quantity of output increases, otherwise, cost of production per unit is getting cheaper as the scale of production increases, thus the firm would be producing at a lower average cost (Sloman, 2004). Due to certain reasons, the firm is likely to experience economics of scale. Such reasons are, labour specialization. When a firm hires more workers, a firm can divide jobs according to the employees’ specialization; therefore, production would become more efficient as employees are more efficient in their particular job. Besides that, the grater efficiency of larger machines, by-products and multi-stage production could allow firms to experience economics of scale. Firms may also experience economics of scale due to financial economies as large firms may be able to obtain finance at lower interest rates than smaller firms. In the section of diseconomies of scale, it shows that the cost per unit of each output starts to increase gradually at Q2. At this point, the firm becomes harder to manage as the firm becomes larger and the line of communication becomes longer (DBM CD, viewed 3rd July 3, 2007). Besides that, according to Sloman, (2004), workers may feel ‘alienated’ if their jobs are repetitive and boring and when they feel that they are a small part of the organization causing a poor motivation towards their work. All and all, these problems cause the firm’s average cost to increase. As a conclusion, production in the short-run is the production period of time over which at least one factor is fixed as production in the long-run is the production period of time long enough for all factors to be varied. Short-Run Production and Long-Run Production free essay sample According to Sloman, (2004), production is the transformation of inputs into outputs by firms in order to earn profit. Production can be divided into two types, that is short-run production and long-run production. Production in the short-run is the production period of time over which at least one factor is fixed as production in the long-run is the production period of time long enough for all factors to be varied. As mentioned by Sloman, (2004), production in the short-run is subject to diminishing returns. The law of diminishing (marginal) return applies whereby there will be a point when each extra unit of the variable factor will produce less extra output than the previous unit when the increasing amount of a variable factor are used with a given amount of a fixed factor. For example, a fixed factor would be the factory as the variable factor would be labour. As the factory is a fixed factor, the output of the factory will only be increased if the number of employers employed is increased and as more and more workers are hired, the factory would become more crowded making it uncomfortable for the workers to produce at an optimal rate. We will write a custom essay sample on Short-Run Production and Long-Run Production or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page Thus, after a certain amount of workers hired, the production rate would then start to diminish. The opportunity cost is the cost of any activity measured in the expense of the firm. To apply the principle of opportunity cost to the firm, the factors of production it is using must be discovered and the sacrifice involved must be measured. Factors of the firm’s production can be divided into to categories. Explicit cost, which costs are not owned by the firm. (Sloman, 2004) Explicit costs are the payments made to the factors of production to outside suppliers of inputs, namely rental for land, salary and wages for labour, bills and interests of capital. Implicit cost, which factors are already owned by the firm (Sloman, 2004). Implicit costs are cost which does not require payment inform of money to any third party but payment as the form of sacrifice of come other alternatives. Such examples of implicit cost of the firm are the opportunity lost by the firm when it decides to use the building it owns rather than to let it out to receive rental or the opportunity lost by the firm’s owner when he decides to start a company than to work under someone else with a stable income. In the short run production, there are 3 aspects of costs to be considered. (DBM CD) 1. Total Costs (TC) = Total fixed cost (TFC) + Total variable cost (TVC), which are the total cost of production as more units are being produced 2. Average Cost (AC) = TC/Quantity (Q), which are the costs which decreases as output increases; and rises again at a certain point 3. Marginal Cot (MC) = TCÂ ¬1-TC0/Q1-Q0, which changes as the output differs, initially decreasing than rising again. Graph1 Graph 2 As seen on Graph 1, the total fixed cost line is parallel to the quantity at a certain value of cost as the total variable cost line start from the value 0 of both quantity and total cost. Thus, total costs are the sum of the total fixed cost and the total variable cost. Even if the is no output, there would be a fixed cost, so the total cost of the firm at 0 output would only be the total fixed cost. As on graph 2, the AFC continuously falls as output rises. Applying the law of diminishing returns, both the MC and the ATC curve shows that the costs of production falls as quantity increases and rises up again at a certain point. This happens when the workforce necessary to produce a higher output is more compared to an optimal output by current workforce causing a hike in the MC and ATC. As mentioned above, production in the long run is the period of time that is enough to change the quantity of all fixed inputs, whereby all factors in of production are variable. Costs per unit Economies of ScaleConstant return to scaleDiseconomies of scale Qty of Output Graph extracted from DBM CD, page 43 In the section of economies of scale from the graph, it shows that the cost per unit for each output decreases as the quantity of output increases, otherwise, cost of production per unit is getting cheaper as the scale of production increases, thus the firm would be producing at a lower average cost (Sloman, 2004). Due to certain reasons, the firm is likely to experience economics of scale. Such reasons are, labour specialization. When a firm hires more workers, a firm can divide jobs according to the employees’ specialization; therefore, production would become more efficient as employees are more efficient in their particular job. Besides that, the grater efficiency of larger machines, by-products and multi-stage production could allow firms to experience economics of scale. Firms may also experience economics of scale due to financial economies as large firms may be able to obtain finance at lower interest rates than smaller firms. In the section of diseconomies of scale, it shows that the cost per unit of each output starts to increase gradually at Q2. At this point, the firm becomes harder to manage as the firm becomes larger and the line of communication becomes longer (DBM CD, viewed 3rd July 3, 2007). Besides that, according to Sloman, (2004), workers may feel ‘alienated’ if their jobs are repetitive and boring and when they feel that they are a small part of the organization causing a poor motivation towards their work. All and all, these problems cause the firm’s average cost to increase. As a conclusion, production in the short-run is the production period of time over which at least one factor is fixed as production in the long-run is the production period of time long enough for all factors to be varied.