Microeconomics - Modifying Output

The "Short Run"
The short run is a time period so short that the firm cannot alter some production factors (typically these factors include the size and/or number of plants, the technology used, equipment and the management organization). Those factors are sometimes referred to collectively as the "plant". The firm usually can increase output in the short run by adding variable inputs. Labor is the most common variable input.

The "Long Run"
In the long run, firms have sufficient time to adjust to any and all production factors. Factories can be expanded, shrunk, demolished or built. The firm can leave or enter an industry.

Suppose a car manufacture decides to build a new plant to build SUVs. This would be an example of a decision made in the long run. If that manufacturer decided to expand output by having employees work overtime, then that would be an example of a short-run decision.

Look Out!
Differences between the "short run" and the "long run", and the concept of economic profit are critical to understanding economics!


  • Total Product: The total product is the total quantity of goods produced, in association with specified levels of input.
  • Marginal Product: The marginal product is the change in output that occurs when one more unit of input (such as a unit of labor) is added.
  • Average Product: The average product is the total product divided by the number of input units, usually a variable input such as labor.

Example:
Suppose only one worker was present at an assembly plant and that worker had to do all functions of the plant - order and stock supplies, assemble the good, provide maintenance for the factory, prepare the good for shipping, etc. If a second worker is added, there may be a larger increase in productivity, as the two workers can allocate the tasks according to their abilities, and less time will be lost going to and from various locations in the plant.

A possible schedule of plant output could be as follows:

In this example, hiring the fourth worker increases output by 110 units, which is not as large as the increase created by hiring the third worker.

The cost of all production factors is equal to the firm's total cost (TC). Total fixed costs (TFC) include all fixed costs, while total variable costs (TVC) include the cost of all variable inputs such as labor. Marginal cost is the increase in costs associated with producing additional output. At some point in time, marginal costs will begin to increase because each additional worker contributes less to total output. The average fixed cost (AFC) is the fixed cost per unit of output, while the average variable cost (AVC) specifies the variable cost per unit of output. AFC and AVC combined are equal to the average total cost (ATC). As production increases, average fixed cost (total fixed cost divided by quantity) will decrease. When marginal cost exceeds average total cost, average total costs will go up, at which point the firm must receive higher prices if higher production is to occur.

The table below assumes that the firm has fixed costs of $1,000 per day, each worker is paid $200 per day, and each unit produced has variable material costs of $1 per unit.

From the table above we can see that both average total cost and marginal cost initially decrease as production increase, but both start going up at certain levels of production.

Marginal and Average Total Cost Curves


Related Articles
  1. Economics

    Understanding Marginal Cost of Production

    Marginal cost of production is an economics term that refers to the change in production costs resulting from producing one more unit.
  2. Professionals

    Marginal and Average Total Cost Curves

    Marginal Cost Curve and the Average Total Cost Curve. Learn the different types of economic cost curves and the law of diminishing returns.
  3. Economics

    What Does Short Run Mean?

    Short run is the concept that for a business, at least one factor of production is fixed while others are variable.
  4. Professionals

    Break-Even Analysis

    This analysis is used to determine the point at which revenue received equals the costs associated with receiving the revenue
  5. Economics

    What Does Long Run Mean?

    A long run is a period of time in which all factors of a business’ production and costs are variable.
  6. Professionals

    Effects on Equilibrium in the Short and Long Run

    Effects on Equilibrium in the Short and Long Run. Examines how various short and long term changes affects equilibrium.
  7. Professionals

    Components of Marginal Product and Marginal Revenue

    CFA Level 1 - Components of Marginal Product and Marginal Revenue
  8. Professionals

    Perfectly Competitive Markets

    Perfectly Competitive Markets. Learn the aspects of a purely competitive market and how firms can maximize profit under these conditions.
  9. Forecasting and Modeling Costs

    When we model costs, two important factors need to be taken into account: 1) Distinguish between fixed and variable costs. This is important because fixed and variable costs will not change the ...
  10. Investing

    Variable Costs

    Variable costs go up when a company produces more goods or services, and go down when it produces fewer goods or services. This is compared to fixed costs, which do not change in proportion to ...
RELATED TERMS
  1. Variable Cost

    A corporate expense that varies with production output. Variable ...
  2. Unit Cost

    The cost incurred by a company to produce, store and sell one ...
  3. Operating Cost

    Expenses associated with the maintenance and administration of ...
  4. External Diseconomies Of Scale

    External factors beyond the control of a company increases its ...
  5. Full Costing

    A managerial accounting method that describes when all fixed ...
  6. Cost Accounting

    A type of accounting process that aims to capture a company's ...
RELATED FAQS
  1. How do fixed and variable costs each affect the marginal cost of production?

    Learn about the marginal cost of production, how to calculate the marginal cost, and how fixed costs and variable costs affect ... Read Answer >>
  2. Do production costs include all fixed and variable costs?

    Learn more about fixed and variable costs and how they affect production costs. Understanding how to graph these costs can ... Read Answer >>
  3. Is it better for a company to have fixed or variable costs?

    Understand the difference between a fixed cost and a variable cost, and learn how a company benefits from having more fixed ... Read Answer >>
  4. How are fixed costs treated in cost accounting?

    Learn how fixed costs and variable costs are used in cost accounting to help a company's management in budgeting and controlling ... Read Answer >>
  5. How is the marginal cost of production used to find an optimum production level?

    Understand more about production cost calculations, and specifically how the marginal cost of production is used to determine ... Read Answer >>
  6. What's the difference between diminishing marginal returns and returns to scale?

    Understand the main differences between the law of diminishing marginal returns and the concept of returns to scale through ... Read Answer >>
Hot Definitions
  1. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  2. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  3. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  4. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  5. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
  6. DuPont Analysis

    A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are ...
Trading Center