Short run: is a time period in which the quantity of one or more resources used for production is fixed.
In the short run:
- Capital (tools, computers, buildings) is fixed
- Resources like labour can be changed
- Decisions can be easily changed
In this section, we will look at how the changes in labour affect the output in production.
3 Product Curves
Total Product: the maximum output a given quantity of labor can produce.
Marginal Product: The additional output gained from increasing one-unit of labor.
Average Product: The total product divided by the quantity of labor.
Law of Diminishing Returns
Notice from the marginal and average product curve that the law of diminishing returns applies.
Notice the 2 features:
- Both curves increase due to specialization and division of labour.
- Both curves decrease later due to less access to capital, and less space to work.
In other words,
Hire more workers → Less productivity of workers→ Less gain in output
Maximizing Average Product
How can we maximize average product? Let’s look at the marginal & product curve in one graph.
- When MP > AP, the additional one-unit increase gives more output than the average output gained.
- When MP < AP, the additional one-unit increase gives less output than the average output gained.
- When MP = AP, the additional one-unit increase gives the same output as the average output gained.
Therefore, average product is maximized when MP = AP.