SHORT-RUN THEORY OF PRODUCTION SHORT-RUN THEORY OF PRODUCTION • Profits and the aims of the firm • Long-run and short-run production: – fixed and variable factors • The law of diminishing returns • The short-run production function: – total physical product (TPP) – average physical product (APP) – marginal physical product (MPP) – the graphical relationship between TPP, APP and MPP
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SHORT-RUN THEORY OF PRODUCTION Profits and the aims of the firm Long-run and short-run production: – –fixed and variable factors The law of diminishing.
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SHORT-RUN THEORY OF PRODUCTIONSHORT-RUN THEORY OF PRODUCTION
• Profits and the aims of the firm
• Long-run and short-run production: – fixed and variable factors
• The law of diminishing returns
• The short-run production function:– total physical product (TPP)
– average physical product (APP)
– marginal physical product (MPP)
– the graphical relationship between TPP, APP and MPP
• Profits and the aims of the firm
• Long-run and short-run production: – fixed and variable factors
• The law of diminishing returns
• The short-run production function:– total physical product (TPP)
– average physical product (APP)
– marginal physical product (MPP)
– the graphical relationship between TPP, APP and MPP
Wheat production per year from a particular farm (tonnes)Wheat production per year from a particular farm (tonnes)
0
10
20
30
40
0 1 2 3 4 5 6 7 8
Wheat production per year from a particular farmWheat production per year from a particular farm
Number of farm workers
To
nne
s o
f wh
eat
pro
du
ced
pe
r ye
ar
Number of workers
012345678
TPP 0 310243640424240
Wheat production per year from a particular farmWheat production per year from a particular farm
0
10
20
30
40
0 1 2 3 4 5 6 7 8
Number of farm workers
To
nne
s o
f wh
eat
pro
du
ced
pe
r ye
ar TPP
Wheat production per year from a particular farmWheat production per year from a particular farm
0
10
20
30
40
0 1 2 3 4 5 6 7 8
Number of farm workers
To
nne
s o
f wh
eat
pro
du
ced
pe
r ye
ar TPP
a
b
Diminishing returnsset in here
Wheat production per year from a particular farmWheat production per year from a particular farm
0
10
20
30
40
0 1 2 3 4 5 6 7 8
Number of farm workers
To
nne
s o
f wh
eat
pro
du
ced
pe
r ye
ar TPP
a
b
d
Maximum output
0
10
20
30
40
0 1 2 3 4 5 6 7 8
Wheat production per year from a particular farmWheat production per year from a particular farm
Number offarm workers (L)
Ton
nes
of w
heat
per
yea
r
TPP
-2
0
2
4
6
8
10
12
14
0 1 2 3 4 5 6 7 8
Ton
nes
of w
heat
per
yea
r
Number offarm workers (L)
TPP = 7
L = 1
MPP = TPP / L = 7
0
10
20
30
40
0 1 2 3 4 5 6 7 8
Wheat production per year from a particular farmWheat production per year from a particular farm
Ton
nes
of w
heat
per
yea
r
TPP
-2
0
2
4
6
8
10
12
14
0 1 2 3 4 5 6 7 8
Ton
nes
of w
heat
per
yea
r
MPP
Number offarm workers (L)
Number offarm workers (L)
0
10
20
30
40
0 1 2 3 4 5 6 7 8
Wheat production per year from a particular farmWheat production per year from a particular farm
Ton
nes
of w
heat
per
yea
r
TPP
-2
0
2
4
6
8
10
12
14
0 1 2 3 4 5 6 7 8
Ton
nes
of w
heat
per
yea
r
APP
MPP
APP = TPP / L
Number offarm workers (L)
Number offarm workers (L)
0
10
20
30
40
0 1 2 3 4 5 6 7 8
Wheat production per year from a particular farmWheat production per year from a particular farm
Ton
nes
of w
heat
per
yea
r
TPP
-2
0
2
4
6
8
10
12
14
0 1 2 3 4 5 6 7 8
Ton
nes
of w
heat
per
yea
r
APP
MPP
b
Diminishing returnsset in here
Number offarm workers (L)
Number offarm workers (L)
b
0
10
20
30
40
0 1 2 3 4 5 6 7 8
Wheat production per year from a particular farmWheat production per year from a particular farm
Ton
nes
of w
heat
per
yea
r
TPP
-2
0
2
4
6
8
10
12
14
0 1 2 3 4 5 6 7 8
Ton
nes
of w
heat
per
yea
r
APP
MPP
b
d
d
Number offarm workers (L)
Number offarm workers (L)
Maximumoutputb
0
10
20
30
40
0 1 2 3 4 5 6 7 8
Wheat production per year from a particular farmWheat production per year from a particular farm
Ton
nes
of w
heat
per
yea
r
TPP
-2
0
2
4
6
8
10
12
14
0 1 2 3 4 5 6 7 8
Ton
nes
of w
heat
per
yea
r
APP
MPP
b
b
d
d
Number offarm workers (L)
Number offarm workers (L)
Slope = TPP / L= APP
c
c
LONG-RUN THEORY OF PRODUCTIONLONG-RUN THEORY OF PRODUCTION
• All factors variable in long run
• The scale of production:
– constant returns to scale
– increasing returns to scale
– decreasing returns to scale
• All factors variable in long run
• The scale of production:
– constant returns to scale
– increasing returns to scale
– decreasing returns to scale
LONG-RUN THEORY OF PRODUCTIONLONG-RUN THEORY OF PRODUCTION
• Economies of scale– specialisation & division of labour
– indivisibilities
– container principle
– greater efficiency of large machines
– by-products
– multi-stage production
– organisational & administrative economies
– financial economies
– economies of scope
• Economies of scale– specialisation & division of labour
– indivisibilities
– container principle
– greater efficiency of large machines
– by-products
– multi-stage production
– organisational & administrative economies
– financial economies
– economies of scope
LONG-RUN THEORY OF PRODUCTIONLONG-RUN THEORY OF PRODUCTION
• Diseconomies of scale
• External economies and diseconomies of scale
• Optimum combination of factorsMPPa/Pa = MPPb/Pb ... = MPPn/Pn
• Diseconomies of scale
• External economies and diseconomies of scale
• Optimum combination of factorsMPPa/Pa = MPPb/Pb ... = MPPn/Pn