ECONOMICS FOR MANAGERS

Economics for Managers by Paul Farnham y Chapter 5:
Production and Cost Analysis in the Short Run
© 2005 Prentice Hall, Inc.

5.1

Defining the
Production Function
P d ti
F
ti
The formula can be read as “quantity of quantity output is a function of the inputs listed inside the parentheses”

Q = f (L, K, M…) where Q = quantity of output
L = quantity of labor input
K = quantity of capital input y M = quantity of materials input
© 2005 Prentice Hall, Inc.

5.2

Fixed Inputs Versus
Variable I
V i bl Inputs t Fixed input: quantity a manager cannot change during a given g g g time Variable input: quantity a manager can change during a given time
Amount of output would vary as managers made decisions regarding amounts of input
© 2005 Prentice Hall, Inc.

5.3

Short-run Versus
Long-run P d ti
L
Production
Not expressed in terms of calendar time, but in terms of
,
fixed and variable inputs
Short run
Short-run production function: involves at least one fixed input
Long-run
Long run production function: production process in which all inputs are variable
© 2005 Prentice Hall, Inc.

5.4

Managerial Rule of Thumb:
Short run
Short-run Production and
Long-run Planning
Managers operate in the short run, but must have long-run vision i i
They need to be aware that the current amount of fixed inputs t t f fi d i t may not be appropriate as market conditions change
Managers make more long run economic decisions
© 2005 Prentice Hall, Inc.

5.5

Model of the Short-run
Production Function
P d ti
F
ti
Total product: total quantity of output produced with a given quantity of fixed and variable inputs

TP or Q = f (L, K) where TP or Q = total product or quantity p q y of output
L = quantity of labor input
K = quantity of capital input
© 2005 Prentice Hall, Inc.

5.6

Average Product
Average product: amount of
A
d t t f output per unit of variable input
AP = TP / L or