Essay, Pages 2 (474 words)
“How is the short-run production function different from a long-run one? Explain how a firm can select the optimal quantity of input in each case ” And the second question is: “Elaborate on the various methods of reducing the ATC in the imminent short run and in the long run. ”
Production function is a function that specifies optimal output of a production from all combinations of input. Inputs include labor, machinery, buildings, raw materials and energy.
But typically inputs are divided into only two categories, Labor and capital where capital includes machinery, buildings, raw materials and energy.
All things that firms can invest in, in order to produce products or output. Production function can also be defined as the specification of the minimum input requirements needed to produce designated quantities of output, given available technology or a set of all technically efficient techniques. But production technique is technically efficient if there is no other way to make a given output using less of one input and no more of other inputs.
In order to optimize profit, firms want to optimize there production function, use the best combination of inputs in order to get optimal quantity of output.
Actions or decisions
Actions or decisions that a firm can take in order to optimize their production function can be distinguished as either short-run or long-run decisions. Short-run decision or action is something that will affect the production in a short time period. Example of a short-run decision is to let the workers work overtime, that is something that will be affected almost immediately.
Long-run decision or an action on the other hand is something that will affect the production in a longer time period, months or years.
Buy a new machine or move the production to a new building is a long-run action. So we can say that in the short run the capital part of the production function is fixed, can not be changed only the labor part can be changed. But in the long-run both labor and capital can be changed. So the main difference between the short-run and long-run production function is that in the long-run there is more room for experimenting, for error and for rectifying what does not work, Optimal results can be achieved over time whereas in the short run they need to be achieved immediately to provide and optimal result and cost efficiency.
Production function is an equation that relates the quantity of input to the quantity of outputs. In measuring productivity we must take into consideration the total product which is the total output, the averages product and the marginal product. In doing so, we will also calculate the total cost, the average variable cost and fixed cost and marginal cost. Each of these is necessary in determining the optimal use of inputs and outputs.