In the previous session, we discussed the Isoquant Curve for a firm. As we know, a firm is an entity which undertakes the process of production. Production is a process through which the inputs are converted into outputs. Inputs are the factors of production. And output are products which are either consumed by consumers directly or are consumed by other firm in their process of production.
So to study behavior of a firm i.e., the context of economic decision making of firm in face of limited resources, it becomes of utmost important to study the production i.e., conversion of input to output. And the relationship between input and output is defined by the production function of a firm.
Production Function of a firm, shows the maximum output possible for a firm for a given amount of input. Hence, studying the production function becomes utmost important for the same.
The set of all combinations of inputs which gives the same maximum level of output as per production function, is called an Isoquant. And the curve representing all these sets or points on a graph is known as Isoquant curve. Production function always assumes the principle of efficiency meaning the level of output given by the production function is the maximum possible that the firm can achieve for a given technology. In order to increase output in such a scenario, at least one of the input need to be increased with other remaining same. Thus if output increases with one of the input or all increased, the same input set would now be represented on a higher isoquant curve as the inputs have increased so too the maximum possible output for that set of inputs.
In this session, we will further discuss the relationship between the inputs and outputs through discussion of Total Product, Average Product and Marginal Product.
The Short Run and the Long Run
Before we move on to discuss Total Product, Average Product and Marginal Product, it is very important to understand the context of time in economics. In what time is the firm is altering inputs and producing output? Is a firm altering all inputs or few? And to answer all of these, it becomes very important to understand what is the definition of Short Run and Long Run for a firm.
For simplicity, we take into consideration that the firm uses two factors of production namely, Labor (L) and Capital (K).
The Short Run for a firm is a time period in which at least one of the factors of the firm i.e., either labor or capital remains fixed i.e., the firm cannot alter the same or the factor cannot be varied. And thus in order to alter the production level, out of these two factors, firm can only alter the one factor which varies. The factor which varies is called the Variable Factor and the factor which remains fixed is called the Fixed Factor.
For example, out of labor and capital if we keep the capital fixed, then with alteration in labor we can increase or decrease the level of output or production. So keeping the Capital fixed, the output can be increased by increasing the labor and vice versa.
The Long Run for a firm is a time period in which all factors can be varied i.e., firm can alter or change or vary all the inputs that it used in production. So in the long run, all the factors of production can be varied and in order to change the level of output, the firm can vary all the inputs or factors of production simultaneously together. So in the long run, all factors of production are variable and there is no fixed factor compulsion.
So in general the long run is a time period which is greater than the short run, because the long run period is different for different production processes and cannot be defined in terms of months or years. So to say, in order to define whether a time period is short run or long run, we simply look that whether all the factors of production or input are variable or not. If yes, it will be long run and if not then short run.
Total Product, Average Product and Marginal Product
Total Product
As we defined that short run is a period where not all factors can be varied, at least one remains fixed. And at the same time we even know that in the short run, we can even vary the output by altering even a single variable factor. So let us take a situation, where out of all inputs, one of the input is variable and all others remain fixed. Now as all other inputs remain constant, the level of output will directly be pivoted by the single factor or input which is variable. We call that a variable factor and other inputs are called the fixed factors.
The relationship thus established between the variable input and the total output, keeping all other inputs fixed or constant, is defined as the Total Product of the variable input.
Here as above, for simplicity we have kept only two inputs or factors of production in consideration i.e., Labor and Capital. And in short run, at least one factor remains fixed.
The following is a table showing the various output levels for given amount of inputs.
Let us keep the Capital as a fixed factor and labor as variable. Keeping Capital fixed at 4 units, looking at the same column of Capital = 4 units, we get the output levels for various level of units of labor. Thus here the output is varying as per the variation in labor. The values thus in the column with Capital at 4 units are referred to as Labor schedule with Capital (K) = 4 units. These values are also referred to as the Total Return to the Variable input or Total Physical Product to the Variable Input.
Average Product
Average Product is the output per unit of variable input. So in order to calculate the Average Product, we simply divide the Total Product by the Variable Input.
Here in our example from the table, we can say
Here continuing the example with Capital (K) fixed at 4 units, the average product of labor from the above production function example is as follows;
Here in our example from the table, we can say
Marginal Product
Marginal Product of an input is the change in output for per unit of change in variable input, keeping all other inputs constant or fixed.
In our example, with Capital (K) kept constant, the marginal product of Labor (L) is
Important Note
As the input cannot have any negative value, the Marginal Product is undefined at zero (0) input.
One more thing to note here is that, for any level of input, the addition of marginal product with preceding unit’s one, gives the total product. This means the Total Product sum of Marginal Products.
So the Total Product, Average Product and Marginal Product can be summarized as below.
Conclusion
In this session, we discussed in detail the concept of the Short Run and the Long Run. And then we studied several relationships between the variable input and total output through Total Product, Average Product and Marginal Product.
Social Plugin