The difference between the short and long run
A crucial difference:
– Fixed costs are constant. They remain the same whatever the level of output.
– Variable costs change or vary with the amount of production.
How do you manage costs which do not vary with the level of output?
The difference between variable, fixed and total costs.
In the SHORT RUN, one factor of production is fixed.
In the LONG RUN, all factors of production are variable.
How costs vary with output differs between the short run and long run.
SHORT RUN
Key definitions:
– Total product is the total output produced by a firm’s workers.
– Marginal product is the addition to total product after employing one more unit of factor input. Therefore, the marginal product of labour is the additional output produced after employing one more worker.
The concepts of marginal product and marginal costs.
Short-Run Average Fixed Costs
Short-Run Average Variable Costs
Short-Run Average Total Costs
Short-Run Marginal Costs
Short-Run Total Fixed Costs: SFC
Short-Run Total Variable Costs: SVC
Short-Run Total Costs: STC
Productivity and Cost in the Long Run
In the LONG-RUN, both CAPITAL and LABOUR are Variable.
Firms can change the number of machines or office space that they use.
Therefore, the law of diminishing returns does not determine the productivity of a firm in the long-run.
In the long-run, productivity and costs are driven by returns to scale.
The law of diminishing returns
Economies of scale
Production techniques: Ford and Ferrari
Indivisibilities: Jumbo jets
Geometric relationships: Storage tanks
Diseconomies of scale: Bureaucracy