7.3 Production in the Short Run Flashcards
What are Fixed factors of production?
The firm owns a small factory with the necessary machinery and equipment—this is the firm’s stock of capital, and we will assume that it is fixed in quantity. We call these the fixed factors of production.
What are Variable inputs?
The firm also purchases intermediate inputs, such as wood, glue, and electricity, and, of course, hires workers. The intermediate inputs and the labour services are the firm’s variable inputs.
The relation of output to changes in the quantity of the variable factor (labor) can be looked at in three different ways. What are they?
- Total Product (TP)
- Average Product (AP)
- MArginal Product (MP)
What is Total Product (TP)?
Total product (TP) is the total amount that is produced during a given period of time. For any given amount of the fixed factor, the total product will change as more or less of the variable factor is used.
What is Average Product (AP) ?
Average product (AP) is the total product divided by the number of units of the variable factor used to produce it. If we let the number of units of labor be denoted by L, the average product is given by
AP = TP/L
What is the point of diminishing average productivity?
The level of labor input at which average product reaches a maximum (8 units of labour in the example) is called the point of diminishing average productivity. Up to that point, the average product is increasing; beyond that point, the average product is decreasing.
What is Marginal Product (MP) ?
Marginal product (MP) is the change in total product resulting from the use of one additional unit of the variable factor. Recalling that the Greek letter Δ (delta) means “the change in,” marginal product is given by
MP = ▲TP/▲L
What is the point of diminishing marginal productivity?
The level of labour input at which marginal product reaches a maximum is called the point of diminishing marginal productivity.
What is the Law of Diminishing Returns?
law of diminishing returns
The hypothesis that if increasing quantities of a variable factor are applied to a given quantity of fixed factors, the marginal product of the variable factor will eventually decrease.
What is a common-sense explanation of the law of diminishing returns?
The common sense explanation of the law of diminishing returns is that in order to increase output in the short run, more and more of the variable factor is combined with a given amount of the fixed factor. As a result, each successive unit of the variable factor has less and less of the fixed factor to work with.
How is division of labor and marginal product related?
If additional workers allow more efficient divisions of labour, marginal product will rise: Each newly hired worker will add more to total output than each previous worker did.
What is the relationship between marginal and average product?
The relationship between marginal and average measures is very general. If the marginal is greater than the average, the average must be rising; if the marginal is less than the average, the average must be falling.
