Production and cost

ECONLESSON-04

long run of production

The time period in which the production is changed by changing all types of inputs

what type of inputs are identified in long run production?

variable inputs only

long run production function

the function which shows the technological relationship between the inputs and outputs in the long run of production is identified as long run production function

Economic theory that explains the long production process

laws of returns to scale

law of returns to scale

the law of returns to scale explains the relationship between the percentage change in the inputs and the percentage change in the output when the production is changed by changing all types of inputs in the long run production process.

three types of returns to scale

1. increasing returns to scale

2. constant returns to scale

3. decreasing returns to scale

increasing returns to scale

increasing returns to scale refers to a situation where output increases at a higher percentage than the percentage increase in the inputs when the production is increased by increasing all types of inputs.

constant returns to scale

constant returns to scale refers to a situation where output increases at same percentage of increase in inputs when production is increased by increasing all types of inputs.

decreasing returns to scale

decreasing returns to scale refers to a situation where output increases at lower percentage of increase in inputs when production is increased by increasing all types of inputs.

reasons for increasing returns to scale

1. Indivisibility of some production factors

2. specialization through division of labor

3. possibility of using machineries

4. there are onetime costs

reasons for decreasing returns to scale

1. scarcity of resources/ constraints regarding the resources

2. stress

3. problems related to the management and co-ordination

production

the process of converting the factors of production into goods and services

business firms

they are the entities which organize the factors of production process by mixing the productive economic resources in order to produce and supply the goods and services demanded by different parties in an economy

5 major types of business organizations found in a market economic system according the their organization structure

1. sole proprietorships

2. partnerships

3. incorporated companies

4. cooperative societies

5. state entrepreneurships

output

the final outcome of a certain production process is identified as the output

inputs

anything which is used within the production process

two types of inputs used in the production process

1. fixed inputs

2. variable inputs

fixed inputs

Fixed inputs are inputs that do not depend on the number of units produced. They are incurred even when output is zero and remain constant as the level of output increases.

examples for fixed inputs

• buildings

• machineries

• equipment

variable inputs

Variable inputs are inputs that depend on the number of units produced. Their requirement is zero when output is zero and increases gradually as the level of output rises.

examples for variable inputs

• labor

• raw materials

production function

A production function shows the functional relationship between inputs and outputs in relation to a particular production activity.

two production times based on types of inputs which can be observed within the production process

1. short run

2. long run

short run

The short run is the time period in which at least one input remains fixed. In the short run, output can be increased only by increasing the variable inputs while keeping the fixed inputs constant. Therefore, both fixed and variable inputs are present in the short-run production process.