Short-Run Production (Cambridge International A-Level Economics)

Short-run production function

• The production function shows the relationship between inputs used in production and the level of output produced

  • In the short run, at least one factor of production is fixed, meaning it cannot be changed quickly
  • Firms increase output mainly by adjusting variable factors

• When additional variable factors are added to fixed factors, output changes according to the production function

Fixed factors of production

• Inputs that cannot be changed in the short run

• Their quantity remains constant as output changes

• Examples include:

  • Machinery
  • Buildings
  • Land
  • Large equipment

Variable factors of production

• Inputs that can be changed in the short run

• Firms adjust these to increase or decrease production

• Examples include:

  • Labour
  • Raw materials
  • Energy inputs

Types of product

1. Total product (TP)

• Total product (TP) is the total quantity of output produced using a given amount of labour and other inputs

• For example:

  • A bakery produces 100 loaves of bread with one baker
  • With two bakers, output increases to 180 loaves

• As more workers are added, total output increases, although the rate of increase may change

2. Marginal product (MP)

• Marginal product (MP) is the additional output produced by employing one more unit of labour
• Formula:

$\mathrm{MP}=\frac{\mathrm{ΔTP}}{\mathrm{ΔQL}}$

• Where:

  • ΔTP = change in total product
  • ΔQL = change in quantity of labour

• For example:

  • Output increases from 100 loaves to 180 loaves when a second worker is hired
  • The marginal product of the second worker is 80 loaves

• Marginal product shows how much extra output each additional worker produces

3. Average product (AP)

• Average product (AP) measures the output produced per worker
• Formula:

$\mathrm{AP}=\frac{\mathrm{TP}}{\mathrm{QL}}$

• Where:

  • TP = total product
  • QL = quantity of labour

• For example:

  • If three bakers produce 240 loaves, then

$\mathrm{AP}=\frac{\mathrm{TP}}{\mathrm{QL}}\,\mathrm{AP}=\frac{240}{3}\,\mathrm{AP}=80$

• So the average product is 80 loaves per worker

The law of diminishing returns

• The law of diminishing returns (also called the law of variable proportions) states that:

  • When increasing amounts of a variable factor are added to a fixed factor, the marginal product of the variable factor will eventually fall

• This occurs because the fixed factor becomes a constraint on production.

  • For instance, in a small coffee shop:

    • The first barista works efficiently alone
    • A second barista improves output, but not as dramatically
    • By the time a sixth barista is hired, they may be crowding each other, leading to minimal gains in output
    • Eventually, adding more workers does not increase total output significantly and may even reduce efficiency

Short-run production in a coffee shop

• This table shows how output increases with each additional worker, but at a decreasing rate
• Eventually, output plateaus, illustrating diminishing returns

Stages of production

• The law of diminishing returns leads to three stages of production
• Firms usually operate in Stage 2, where production is still increasing but diminishing returns have begun

Stage 1: Increasing returns

• Marginal product increases
• Workers specialise and production becomes more efficient

Stage 2: Diminishing returns

• The marginal product begins to fall
• Additional workers still increase output but at a decreasing rate

Stage 3: Negative returns

• The marginal product becomes negative
• Too many workers cause crowding and inefficiency
• Total output may begin to fall

Diagram analysis

• A small food van selling burgers at a music festival increases productivity up to the third worker as workers specialise and the grill is used more efficiently
• After this point, workers begin to get in each other's way and there is limited grill space (capital), so the marginal product of labour begins to fall
• Hiring additional workers still increases total product, but at a diminishing rate
• When the 7th worker is hired, the marginal product becomes negative, causing total product to fall

Understanding the short-run production function helps firms

• Decide how many workers to hire
• Estimate the cost of increasing output
• Identify the point at which adding more labour becomes inefficient
• It also supports broader economic analysis of resource allocation, productivity, and cost structures in different industries