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The Short Run and Long Run Production Function in the Market Structures
The production function provides information about the quantity of factor inputs as to the result of the quantity of outputs and this is measured by total product; average product; and marginal product
1. The total product is generated from the total output from the factors of production employed by the firm. It is the quantity of output produced per time period given the inputs. The total product can easily be determined when applied to manufacturing industries for the production of cars, appliances, cellphones and other products because of clear cut measure as to the volume of production as to the tangible costs on labor and capital inputs.
2. The average product is computed through the total output divided by the number of units of the variables of the factor of production. For example, the 10 factory workers produce 1000 units of electronic components of a computer, therefore the average product of labor is 10 units of electronic components per worker. This example is generated by the output per worker employed in the factory.
3. The marginal product is the change of the total product when there is an additional unit of the input in the factors of production. The additional labor (increased in the number of workers) as an input product may increase the total product. For example, the factory intends to hire two additional workers then the 10 workers with a product of 1000 units may now increase to 1200 units. Therefore , the marginal product is computed by the one-unit change may result to the increase of the total product.
The Period of Production
The short run is a period in which at least one input of the factors of production is fixed. It should be noted that usually factory facilities, equipment and machinery including land are fixed, however, the supply can be altered by changing the demand for labor, raw material, factory components and etc.
Usually a firm or producers have to pay certain production cost form the expenses such as the construction of building for the management office, manufacturing facilities, salaries or wages of the labor and other overhead costs. In the short run,the firm cost structure has to consider the fixed costs (FC) in a given period of time regardless of production level. The variable cost is associated with the production cost.
- Fixed Costs- The cost of production of the investment utilized by the firm. The fixed cost does not vary regardless of the production output. These are overhead cost, rent of offices and buildings, property tax, amortization and interest.
- Variable Cost- This indicates cost of the direct labor, raw materials, supplies and materials. The variable cost is associated in the production of goods.
It must be noted that the Total Costs (TC) presents the sum of the of Total Variable Costs (TVC) and Total Variable Costs (TVC). This is the economic calculation of this presentation and the average cost with that of the Total Costs:
= (TFC + TVC)/Q = AFC + AVC
AC: average costs
TFC: total fixed costs
TVC: total variable costs
AFC: average fixed costs
AVC: average variable costs
In the short run, the total product usually responds to the increase on the use of a variable input. However, you cannot simply add factory workers just to increase the production output. There is a certain point when the marginal product could no longer increase the production output because there are too many workers to work on a fixed capital input just like machinery, equipment and facilities.
This is the reason why the Law of Diminishing Returns is present in the study of production function because the additional units of a variable inputs such as labor and raw material with a fixed land and capital may have consequence on the initial change in total output will at first rise and then fall. The marginal product of labor starts to fall when there are already so many workers producing products with fixed land, capital, equipment and etc. It can reduce the diminishing returns once there is an expansion of the land, equipment, machinery and even the increase of capital, however, we must always consider the average product and marginal product with the standard workers needed in a given number of production output.
The concept of law of diminishing returns is shown above with the production function variables of capital outlay, labor input, total output, marginal product and average product of labor. Let us assume that the fixed capital input in the short run analysis is 30 units available for the production of certain product. There is a certain point of the capital input that could maximized the marginal product, however, once it reaches the peak point the marginal product falls which may show the sign of diminishing return.
Let us take this example in the production function, the fixed capital input of 30 units may need a labor input of 6 workers that may produce 233 for the total output with a marginal product of 60 and average product of labor of 39. The marginal product of 60 is the maximize change of product for 6 workers, however, an additional workers may result to diminishing return to marginal product and eventually to the average product output.
2. Long Run Production
The period of production in the long run shows the production operation of a certain period of time. Normally, the firm expansion on the average cost of production may result the increase of production inputs. However, there are some conditions that:
a) If the firm increases or expand its production operation, is it always increases its production output.
b) Is it possible that the average cost of production may follow the same increase (to let say 50-50%) in the production input and output.
c) If the firm increases by its production input, however, the production output decreases.
The long run production for the expansion of the firm through the economies of scale illustrates the importance of capital intensive ( more equipment per worker) in mass production; increased specialization and division of labor .
Three (3) Possible Cases in Long Run Period of Production
The long run period of production usually analyzes the economies of scale which studies the increasing returns to scale or economies of mass production. It tends to provided information about the unit cost and the size of operation in the production of goods. The economies of scale primarily directed to reduce the unit costs from the increasing size of the operation. That is why the larger firms are more economically viable in the long run production as it diminishes the production cost. Take note that the economies of scale tends to increase in specialization and division of labor. This may lead to increase production inputs and expands the production output.
1. Decreasing Returns to Scale (Increasing Cost)
When the firm becomes large it is likely to encounter problem in the production of a particular product because of the increase average cost of operation. This is the problem of management when increase of production input by 60% the production output reaches only to 40%. In this notion the production is less cheap at a certain scale when it is already large in scale. It requires large-scale machinery or division of labor to produce greater production output.Hence, the Decreasing Returns to scale occur when the percent change in output is greater in percent for the change in inputs.
2. Constant Returns to Scale (Constant Cost)
There is a time for a firm to enjoy a long range of production output for which the average cost is the same proportion to both production input and output. If there is an increase of the number of machines by 50% then there is also an increase of the number of units produced by 50%. This is a constant returns in machinery production.Hence, the Constant Returns to scale occur when the average cost do not increase as a result of diseconomies of scale.
3. Increasing Return to Scale ( Decreasing Cost)
This is known as the economies of scale wherein the firm’s increase in all production inputs and outputs. Supposing a firm increases the inputs by 50% the return of scale increases to 60%.The economies scale expands productive capacity in the long run as it operated by machines and other sophisticated technology that may reduce the overhead cost in producing the products. This is more on capital-intensive production wherein there are more equipment utilize than workers in the production process. In the long run, the manufacturing sectors with high capital investment of equipment results to higher production output that expands the profitability of the firms.The economies of scale is the reduction of unit cost in the long run of operation. The expansion of the firm through a mass production provides greater units of output.