Production Choices and Costs: The Short Run
Read this section to learn about the behavior of the producer in the short run. Attempt the "Try It" problems at the end of the section before checking your answers. Take a moment to read through the stated learning outcomes for this chapter of the text, which you can find at the beginning of each section. These outcomes should be your goals as you read through the chapter.
- Understand the terms associated with the short-run production function – total product, average product, and marginal product – and explain and illustrate how they are related to each other.
- Explain the concepts of increasing, diminishing, and negative marginal returns and explain the law of diminishing marginal returns.
- Understand the terms associated with costs in the short run – total variable cost, total fixed cost, total cost, average variable cost, average fixed cost, average total cost, and marginal cost – and explain and illustrate how they are related to each other.
- Explain and illustrate how the product and cost curves are related to each other and to determine in what ranges on these curves marginal returns are increasing, diminishing, or negative.
Our analysis of production and cost begins with a period economists call the short run. The short run in this microeconomic context is a planning period over which the managers of a firm must consider one or more of their factors of production as fixed in quantity. For example, a restaurant may regard its building as a fixed factor over a period of at least the next year. It would take at least that much time to find a new building or to expand or reduce the size of its present facility. Decisions concerning the operation of the restaurant during the next year must assume the building will remain unchanged. Other factors of production could be changed during the year, but the size of the building must be regarded as a constant.
When the quantity of a factor of production cannot be changed during a particular period, it is called a fixed factor of production. For the restaurant, its building is a fixed factor of production for at least a year. A factor of production whose quantity can be changed during a particular period is called a variable factor of production; factors such as labor and food are examples.
While the managers of the restaurant are making choices concerning its operation over the next year, they are also planning for longer periods. Over those periods, managers may contemplate alternatives such as modifying the building, building a new facility,
or selling the building and leaving the restaurant business. The planning period over which a firm can consider all factors of production as variable is called the long run.
At any one time, a firm will be making both short-run and long-run choices. The managers may be planning what to do for the next few weeks and for the next few years. Their decisions over the next few weeks are likely to be short-run choices. Decisions that will affect operations over the next few years may be long-run choices, in which managers can consider changing every aspect of their operations. Our analysis in this section focuses on the short run. We examine long-run choices later in this chapter.
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