Production

in the
Short-run
Unit 6 - Lesson 1

Learning outcomes:
Distinguish between short-run & long-run
Define Total Product, Marginal Product, &
Average Product
Explain the Law of Diminishing Marginal
Returns
Explain the relationship between Total
Product, Average Product and Marginal
Product.

Short-run vs. Long-run

Short-run:

Not a period of time.

Size of the operation (Factor of Production) is fixed.
Cannot increase Capital or Land.
Only business decision available is to increase or
decrease the number of workers.

Long-run:
Producer has flexibility over all the Factor of Production.
Decide not only number of workers, but also the need to
add/subtract more capital, land (factories, machines).

Summary:
In the short-run the only way for a firm to
expand production is through adding more
workers.
In the long-run the firm can choose to add
capital (machines), land(factories) or more
workers.

Key terms:
Total Product(TP): total amount of output produced
Marginal Product (MP): change in output (TP)
given the addition of an additional worker.
Formula:
MP = change in TP divided by change in Ql (number of workers)

Average Product: amount of output produced per

worker. Formula: AP = TP divided by Ql (workers).

Short-run Production Relationships

Number of
Workers

Number of
Machines

Total Product

15

20

24

26

26

24

Marginal Product

Average Product

Solutions:
Number of
Workers

Number of
Machines

Total Product

Marginal Product

Average Product

4.5

15

20

24

4.8

26

4.33

26

3.7

24

-2

Law of Diminishing Returns:

States as more and more units of a variable input (such as
labour) are added to one or more fixed inputs (such as
land) the marginal product of the variable input at first
increases, but there comes a point when it begins to
decrease or become negative.
This relationship presupposes that that the fixed input(s)
remain fixed, and that the technology of production is also
fixed. (Tragakes, 142)

Diminishing Returns
In our previous chart Diminishing returns begins
when more workers are added after the 3rd worker.
0-3 Workers
As a new worker is added, the MP is increasing.
>4
MP begins to decrease and Diminishing Returns
sets in.

Relationship - MP & TP
0-4 Workers:
When MP is increasing, TP increases at an increasing
rate. After 4 workers, Diminishing Returns begins.
5-9 Workers:
When MP is decreasing, TP increase at a decreasing
rate.
9 Workers:
When MP = 0, TP is at its maximum.
>9 Workers:
When MP is negative, TP is decreasing.

Relationship: MP & AP
MP > AP: AP is increasing.
MP < AP: AP is decreasing.
MP always intersects AP at its
maximum point.