Chapter 5: Production and Cost Analysis in the Short Run 44
CHAPTER 5: PRODUCTION AND COST ANALYSIS IN
THE SHORT RUN
OVERVIEW
This chapter introduces students to short-run production and cost. In the short-run, all production
functions incur diminishing returns when variable inputs are used relative to at least one fixed
input, reducing the additional amounts of the output being produced. Diminishing returns in
production causes a short-run increase in the marginal cost, as production of more output becomes
increasingly costly.
OUTLINE OF TEXT MATERIAL
I. Introduction
A. Production and costs are important for understanding supply.
B. Production functions show how output rises with the inputs used, and the
corresponding cost functions show how costs vary with the level of output produced.
C. Production and cost functions are important for analyzing the behavior and strategy
of individual firms and industries.
II. Defining the Production Function
A. Production Function: The relationship between a flow of inputs and the resulting
flow of outputs in a production process during a given period of time.
1. The production function shows the maximum amount of output that can be
produced with a given combination of inputs.
2. Equation 5.1: Q = f(L, K, M,…)
where:
Copyright © 2015 Pearson Education Ltd.
, Chapter 5: Production and Cost Analysis in the Short Run 45
Q = quantity of output
L = quantity of labor input
K = quantity of capital input
M = quantity of materials input
B. Fixed Inputs Versus Variable Inputs
1. Firms use both fixed and variable inputs in a production function.
2. Fixed Input: An input whose quantity a manager cannot change during a
given period of time. Examples are acreage of land and farm equipment
for crop production.
3. Variable Input: An input whose quantity a manger can change during a
given period of time. Examples are farm workers, fertilizers, and seeds in
crop production.
C. Short-Run Versus Long-Run Production Functions
1. Short-Run Production Function: A production process that uses at least one
fixed input.
2. Long-Run Production Function: A production process in which all inputs
are variable.
III. Model of a Short-Run Production Function
A. Three measures of productivity, or the relationship between inputs and the
output, are total product, average product and marginal product.
B. Total Product: The total quantity of output produced with given quantities of fixed
and variable inputs.
1. Equation 5.2: TP or Q = f(L, )
The bar over K implies that capital stock is fixed.
C. Average Product and Marginal Product
1. Average Product: The amount of output per unit of variable input.
(a) Equation 5.3: AP = TP/L or AP = Q/L
where:
Copyright © 2015 Pearson Education Ltd.
CHAPTER 5: PRODUCTION AND COST ANALYSIS IN
THE SHORT RUN
OVERVIEW
This chapter introduces students to short-run production and cost. In the short-run, all production
functions incur diminishing returns when variable inputs are used relative to at least one fixed
input, reducing the additional amounts of the output being produced. Diminishing returns in
production causes a short-run increase in the marginal cost, as production of more output becomes
increasingly costly.
OUTLINE OF TEXT MATERIAL
I. Introduction
A. Production and costs are important for understanding supply.
B. Production functions show how output rises with the inputs used, and the
corresponding cost functions show how costs vary with the level of output produced.
C. Production and cost functions are important for analyzing the behavior and strategy
of individual firms and industries.
II. Defining the Production Function
A. Production Function: The relationship between a flow of inputs and the resulting
flow of outputs in a production process during a given period of time.
1. The production function shows the maximum amount of output that can be
produced with a given combination of inputs.
2. Equation 5.1: Q = f(L, K, M,…)
where:
Copyright © 2015 Pearson Education Ltd.
, Chapter 5: Production and Cost Analysis in the Short Run 45
Q = quantity of output
L = quantity of labor input
K = quantity of capital input
M = quantity of materials input
B. Fixed Inputs Versus Variable Inputs
1. Firms use both fixed and variable inputs in a production function.
2. Fixed Input: An input whose quantity a manager cannot change during a
given period of time. Examples are acreage of land and farm equipment
for crop production.
3. Variable Input: An input whose quantity a manger can change during a
given period of time. Examples are farm workers, fertilizers, and seeds in
crop production.
C. Short-Run Versus Long-Run Production Functions
1. Short-Run Production Function: A production process that uses at least one
fixed input.
2. Long-Run Production Function: A production process in which all inputs
are variable.
III. Model of a Short-Run Production Function
A. Three measures of productivity, or the relationship between inputs and the
output, are total product, average product and marginal product.
B. Total Product: The total quantity of output produced with given quantities of fixed
and variable inputs.
1. Equation 5.2: TP or Q = f(L, )
The bar over K implies that capital stock is fixed.
C. Average Product and Marginal Product
1. Average Product: The amount of output per unit of variable input.
(a) Equation 5.3: AP = TP/L or AP = Q/L
where:
Copyright © 2015 Pearson Education Ltd.
