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Short Run Production Function:

Economics notes

Short Run Production Function:

➡️ Cost: Costs are the expenses incurred in the production of goods and services. They can be fixed costs, such as rent and wages, or variable costs, such as raw materials and energy. In the short run, fixed costs remain constant while variable costs can be adjusted to meet demand. In the long run, all costs can be adjusted.

➡️ Revenue: Revenue is the income generated from the sale of goods and services. It is the total amount of money received from customers for the goods and services produced.

➡️ Profit: Profit is the difference between revenue and costs. It is the amount of money left over after all costs have been paid. In the short run, profit is maximized by adjusting the level of output to the point where marginal revenue equals marginal cost. In the long run, profit is maximized by adjusting all costs to the lowest possible level.

What is the short run production function and how does it differ from the long run production function?


The short run production function is a relationship between the inputs of a production process and the output produced in the short run, where at least one input is fixed. In contrast, the long run production function is a relationship between the inputs and output in the long run, where all inputs are variable. The short run production function is important because it helps firms to determine the optimal level of output given their fixed inputs.

What is the law of diminishing marginal returns and how does it affect the short run production function?


The law of diminishing marginal returns states that as more units of a variable input are added to a fixed input, the marginal product of the variable input will eventually decrease. This means that the additional output produced by each additional unit of the variable input will be smaller than the previous unit. This law affects the short run production function because it means that there is a point at which adding more of the variable input will not increase output, and may even decrease it.

How can a firm determine the optimal level of output in the short run given its production function and costs?


A firm can determine the optimal level of output in the short run by finding the point where marginal revenue equals marginal cost. This is because at this point, the firm is producing the level of output where the additional revenue from producing one more unit is equal to the additional cost of producing that unit. The firm can use its short run production function to determine the marginal product of its variable input, and use its cost function to determine the marginal cost of producing each unit of output. By comparing these two values, the firm can find the optimal level of output.

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