Short-Run Production and Long-Run Production

Topics: Costs, Economics, Economics of production Pages: 3 (978 words) Published: November 7, 2008
According to Sloman, (2004), production is the transformation of inputs into outputs by firms in order to earn profit. Production can be divided into two types, that is short-run production and long-run production. Production in the short-run is the production period of time over which at least one factor is fixed as production in the long-run is the production period of time long enough for all factors to be varied. As mentioned by Sloman, (2004), production in the short-run is subject to diminishing returns. The law of diminishing (marginal) return applies whereby there will be a point when each extra unit of the variable factor will produce less extra output than the previous unit when the increasing amount of a variable factor are used with a given amount of a fixed factor. For example, a fixed factor would be the factory as the variable factor would be labour. As the factory is a fixed factor, the output of the factory will only be increased if the number of employers employed is increased and as more and more workers are hired, the factory would become more crowded making it uncomfortable for the workers to produce at an optimal rate. Thus, after a certain amount of workers hired, the production rate would then start to diminish. The opportunity cost is the cost of any activity measured in the expense of the firm. To apply the principle of opportunity cost to the firm, the factors of production it is using must be discovered and the sacrifice involved must be measured. Factors of the firm’s production can be divided into to categories.

Explicit cost, which costs are not owned by the firm. (Sloman, 2004) Explicit costs are the payments made to the factors of production to outside suppliers of inputs, namely rental for land, salary and wages for labour, bills and interests of capital.

Implicit cost, which factors are already owned by the firm (Sloman, 2004). Implicit costs are cost which does not require payment inform of money to any third party but...
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