Short Run Production Analysis
When it comes to analyzing the production in the short run, these following assumptions have to be taken into consideration: If all the units that are available are identical or homogenous The firm only produces one product The prices of the product and the inputs are given The firm must use fixed inputs and only one variable input The inputs can be used infinitely divisible amounts The technical relationship between inputs and outputs is given and cannot be changed
The law of diminishing returns states that in the short run, a firm must use the combination of variable and fixed input in the marginal product of the variable input which will eventually decline. This is THE economic principle underlying the analysis of short-run production
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In order to produce and supply larger quantities, higher prices are needed.
These three graphs form part of the foundation of the short run production analysis:
Total Product Curve: what this graph represents is the quantity of the output produced by a given number of workers over a specific period of time. Here the amount of capital is fixed. The increasingly flatter slope of the TP is attributable to the law of diminishing marginal returns.
Average product Curve: this is the quantity of output per unit. Here the input is labour. This deals with the output per worker. It is seen that there is a negatively sloped portion of the AP curve that is indirectly caused by the law of diminishing marginal returns. As marginal product declines, due to the law of diminishing marginal returns, it also causes a decrease in average product.
Marginal Product Curve: what this refers to is the additional output which is produced by one extra unit of input. It is the extra output produced at the margin. The negatively-sloped portion of the MP curve is a direct embodiment of the law of diminishing marginal
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The Production Possibility Curve can be used to illustrate different economic concepts such as opportunity cost, scarcity, economies of scale and allocative efficiency. As well as being a concave shape, the shape could also be a result of from growth of the availability of inputs like physical labour and or capital and technological advances as well as our knowledge on how to use these inputs in order to get the best possible result when it comes to outputs. This kind of shift allows economic growth of the economy that is already operating at its fullest. If the Production Possibility Curve shifts inward if the labour available lessens or the supply of the raw materials decreases or natural disasters deplete the stock of physical
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