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ECN1014 Introductory Economics

Lecture 5: Costs and Production
Section A
Theory of Production

1* The fundamental difference between short-run production and long-run production

Short-Run Long-Run

Some (At least one)

production factors remain
fixed, some factors are
Definition variable All factors are variable

Production can be increased

by
- Hiring new workers
(Variable)
- Extending operating
hours (Variable)
- Purchasing more
ingredients (Variable)

However, certain factors are

constrained by There are no constraints – all
circumstances and cannot be production factors can be added
Examples
easily changed or added. and modified. So, everything is
possible.
- Purchasing a new
technical equipment
(Fixed)
- Extending space
(Fixed)
- Purchasing a new
premises (Fixed)
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Section B
The Long-Run Theory of Production

Economies of Scale Diseconomies of Scale

Definition Definition
Long- Run average total cost falls as output Long-run average total cost rises as output
rises. rises.

Causes
1. Technical Economies
- Ability to invest in better
technology or production
techniques.
2. Managerial Economies
(specialization)
- Large organization subdivided into
different units or departments
with each focus on specific task.
- reduce errors and improve
decision-making.
3. Financial Economies
- Financial reliable, secure loans
- Credit worthy
4. Purchasing Economies
- Purchase in bulk
- Larger discount
Causes
1. Coordination and Control Difficulties
- Difficult to manage
- Too many departments
2. Workers alienation
- Employees feel less attached to
large organizations.
- Productivity decrease
3. Supervisory Problem
- Difficult for top management to
be aware of what happens
- (exp: abuses, frauds, thefts…)
4. Complications in production line
processor and interdependences
- Breakdown in any production
process is liable
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