Economics XII: Production Functions – Short-Run & Long-Run; Law of Variable Proportions and Returns to Scale

Vocabulary flashcards covering short-run vs long-run production, production functions, and the laws of variable proportions and returns to scale.

Short-run

The time period during which at least one input (a fixed factor) cannot be changed; output can only be adjusted by changing variable inputs.

Fixed factors

Inputs whose quantities cannot be changed in the short run (e.g., plant, equipment).

Variable inputs

Inputs that can be varied in the short run to change output (e.g., labor, raw materials).

Long-run

The period in which all factors of production are variable; firms can adjust plant size and all inputs.

Production Function

Relationship showing how output varies with changes in input quantities.

Short-run Production Function

Production function where only one input is variable and all other inputs are fixed (Q = f(L) with fixed K).

Long-run Production Function

Production function where all inputs are variable (Q = f(K,L); allows changes in scale).

Total Product (TP)

Total quantity of output produced with a given combination of inputs during a period.

Average Product (AP)

Output per unit of the variable input; AP = TP / L.

Marginal Product (MP)

Change in total output from using one additional unit of the variable input; MP = ΔTP/ΔL.

Law of Variable Proportions

In the short run, as more units of a variable factor are applied to a fixed factor, TP initially rises at increasing rate, then at diminishing rate; MP and AP behave accordingly.

Increasing Returns to a Factor

Each additional unit of the variable factor adds more to total output; MP increases as more of the variable factor is used.

Constant Returns to a Factor

Each additional unit of the variable factor adds the same amount of output; MP remains constant.

Diminishing Returns to a Factor

Each additional unit of the variable factor adds less output; MP declines as more of the variable factor is used.

Returns to a Factor

Also called the law of variable proportions; study of TP, AP, MP as a single input varies with others fixed.

Stage I

First stage of production where TP rises at increasing then diminishing rate; MP rises then falls; AP rises; ends at the AP maximum.

Stage II

Second stage where TP continues to rise but at a diminishing rate; MP positive but decreasing; AP at its maximum; ends when MP hits zero.

Stage III

Stage of negative returns where TP falls and MP becomes negative; not rational to operate.

Point of inflexion

Point on the TP curve where its slope changes from increasing to diminishing; MP is maximized here.

Returns to Scale

Long-run concept describing how output changes when all inputs are changed in the same proportion.

Increasing Returns to Scale

Output increases more than proportionally when all inputs are increased.

Constant Returns to Scale

Output increases in the same proportion as inputs.

Decreasing Returns to Scale

Output increases less than proportionally when all inputs are increased.

Returns to a Factor vs Returns to Scale

Returns to a Factor is a short-run, single-input concept; Returns to Scale is a long-run, all-input concept.

Optimal Stage to Produce

Rational producers prefer Stage II, where MP is positive and outputs rise with diminishing returns, maximizing profits.

Overcrowding

Too many units of the variable factor on a fixed factor, reducing productivity.