Short-run & long-run increases in

output
Short run Long run

Input 1 Input 2 Output Input 1 Input 2 Output

25 MPP 1 1 15 Increase
3 1
20 20
45 2 2 35
3 2
15 25
60 3 3 60
3 3
10 30
70 4 4 90
3 4
5 35
75 125
3 5 5 5

Diminishing returns Increasing returns

to variable factor to scale
Introductory
Economic
Lecture 14
Recap
 The ‘scale’ of
Production
And
‘return’ to scale
The Location
decision
 Industry size
And
‘External’
Economics of scale
 The Optimum
Combination of
Factors:
The marginal Product
Approach
 It would be possible to reduce
MPPL MPPK
if ≠ cost per unit of output by using a
PL PK different combination of labor
and capital

EXAMPLE
MPPL MPPK
if >
PL PK

More labor should be used relative to capital, since the firm is getting a
greater physical return for its money from using extra workers than it is
getting from using extra capital. However as more and more labor is used,
diminishing returns to labor set in. Thus MPPL will fall. Likewise, as less
capital is used, MPPK will rise. Until

MPPL MPPK Technical or productive

= efficiency point
PL PK
 Multi factor case

MPPa = MPPb = MPPc = MPPn

Pa Pb Pc Pn

Where a . . . n are different factors of

production