Behaviour of Production Process

Short Run and Long Run

Short run is a period where the production process consists both fixed factors as well as variable
factors.
Long run is the period where the production process involves only variable factors.
Production Concept
Total Product
The total product (or total physical product) of a factor of production identifies possible
levels of input.
Average Product
Average product or average physical product is total production divided by the number of
units of the factor of production. Average product is likely to vary as more of the input factor of
production is employed
𝑇𝑃
AP = 𝐿

Marginal Product
Marginal product or marginal physical product is the change in total output due to a one
unit change in the factor input, or the rate of change in total output due to an infinitely small change
in the factor input.
∆𝑇𝑃
MP =
∆𝐿

Short run production function

In the short run, at least one factor of production is fixed.
The business must therefore stick within a range of production levels, although the actual
amount of production can be changed by altering variable inputs.
In many situations the quantity of plant and machinery will be fixed and labour and
materials can be varied.
Law of diminishing marginal returns
The law of diminishing marginal returns says that if one or more factors of production are
fixed (the short run applies), but the input of another factor is increased, the extra output generated
by each extra unit of the variable input will eventually begin to fall.
E.g.

Points to notice in this example:

Diminishing marginal returns set in once the fourth worker is employed (because the marginal
output of adding a fourth worker (6) is lower than the marginal output from adding a third worker
(7)).
Average product initially rises due to the effects of division of labour and specialisation, including
the employment of the fourth worker (4) after which AP begins to fall because the marginal product
from the fifth (5) and successive workers are less that the average product and are pulling the
average down.
Total output continues to rise as workers four to seven are added, and only starts to fall when the
eighth worker (8) is added. This is because the eighth worker has a negative marginal product:
their presence is actually obstructing production in some way.

The concept of diminishing returns can be broken down by considering the three stages of
production.
Stage one represents the highest period of growth in production. During this stage every additional
variable unit of input will result in the production of additional outputs, or products; there are
increasing marginal returns. All three cost curves (total product, average product and marginal
product) will be positive and rising.
In Stage two marginal returns will begin to decrease. This means that while each additional
variable unit of input will still lead to more units of output, the rate at which this occurs will begin
to slow. The increase of outputs for each input will be at a reducing rate. During this stage, the
total product curve will continue to rise, however both the average product curve and marginal
product curve will start to fall.
In Stage three, the marginal returns become negative. This means that any additional units of input
now result in less overall production. In this final stage, the total product curve will now also begin
to fall. The average product curve will continue to drop, while the marginal product curve will
become negative.

Long run production function

In the long run, all factors of production can be varied. How output responds to change in input
will be measured by returns to scale.
Increasing returns to scale
Increasing returns to scale (% change in output is greater than the % change in input) imply
that the business is benefiting from economies of scale.
Decreasing returns to scale
Decreasing returns to scale (% change in output is less than the % change in input) mean
that diseconomies of scale exist.
Constant return to scale
Constant return to scale means the % change in output is less than % change in input.
*Detailed note on return to scale theory will be provided with cost theory