DANAO STATE UNIVERSITY

MGT 202 – Business Economics

Chapter 8 Production and

Cost in the Short Run

BY AL-KHAIR SANGCOPAN, R.A

Some General Concepts in Production
and Cost

Production
1 Definition 2 Key Factors

Production refers to the process of Factors of production include land, labor,

transforming inputs into outputs, resulting capital, and entrepreneurship.
in the creation of goods or services.
Production Function
1 Definition 2 Formulas

The production function represents the Q = F(L,K)

relationship between the inputs used in
production and the output generated. It
shows how much output can be produced
with different combinations of inputs.
Variable Proportions Production

1 Definition

Variable proportions production refers to a situation where the

input proportions can be adjusted to change the output. This
allows for flexibility in production.

2 Example

Increasing the number of workers while keeping the other inputs

constant in a restaurant can lead to higher output initially, but
eventually, diminishing returns may be observed.
Fixed Proportions Production
1 Definition 2 Example

Fixed proportions production occurs when In the production of candles, a fixed

the input proportions are fixed and cannot amount of wax and wick is required to
be adjusted. This limits the flexibility in produce each candle. Changing the
production. proportion of wax and wick would result in
a flawed product.
Technical Efficiency
1 Definition

Refers to the ability of a process, system, or organization to

produce maximum output or achieve a specific goal using the
least amount of inputs or resources. In sample terms, its about
getting the most out of what you have.

2 Importance

Being technically efficient ensures that resources are utilized

optimally, minimizing waste and maximizing production.
Economic Efficiency
1 Definition

Economic efficiency refers to producing the maximum output at

the lowest possible cost, taking into account both input prices and
output prices.

2 Example

In a manufacturing goods, economic efficiency can be achieved by

minimizing production costs without compromising product
quality.
Inputs in Production
1 Variable Input 2 Fixed Input

A variable input can be A fixed input remains

easily adjusted in the short constant in the short run
run to modify the output. and cannot be altered to
change the output.

3 Quasi-Fixed Input

A quasi-fixed input is typically fixed in the short run but can be

adjusted in the long run.
Examples
1 Example 1: Coffee Shop
In a coffee shop, the
number of baristas is a
variable input that can be
adjusted based on
anticipated customer
demand.
2 Example 2: Car
Manufacturing
In car manufacturing, the
factory building is a fixed
input that cannot be easily
adjusted in the short run.

3 Example 3: Airlines

In the airline industry, the number of aircraft is a quasi-fixed input

that requires long-term planning and investment.
Short-Run and Long-Run
Production Periods
1 Short Run 2 Long Run

The short run refers to a The long run signifies a

period where at least one period where all inputs are
input is fixed, and it takes variable, and the
time to adjust production production levels can be
levels. adjusted as desired.

3 Planning Horizon

The planning horizon is a timeframe considered when making

long-term decisions, typically extending beyond the short run.
Sunk Costs versus Avoidable
Costs
Sunk costs are expenses that have already been incurred and cannot be
recovered. Avoidable costs, on the other hand, are expenses that can be
eliminated or reduced. Let's explore the difference in the context of
production.
Production in the Short Run

Sunk Costs Avoidable Costs

These costs are already invested and cannot be These costs can be managed and reduced to
changed in the short run. increase efficiency.
Average and Marginal Products of Labor
Average Product of Labor Marginal Product of Labor
MPL measures the addional output
It measures the average output produced by
produced when one more unit of labor is
each worker.
added while keeping other inputs constant..

Formula: APL = Total Output / Total Units of Formula: MPL = Change in Total Output /
Labor Change in Labor Input
Law of Diminishing
Marginal Product
The law of diminishing marginal product is an economic principle that
states as you increase the quantity of one input (like labor) while keeping
other input constant, the marginal (additional) output produced by that
input will eventually decrease. In simpler terms, it means that as you add
more of a particular resource to a fixed production process, the increase
in output you get from each additional unit of that resource will start to
decline.
Changes in Fixed Inputs

1 Fixed Inputs

Resources that cannot be easily

changed in the short run.
Examples 2
Land, buildings, and specialized
machinery. 3 Effects

Changes in fixed inputs can impact

productivity and cost structure.
Short-Run Total Costs
Total Fixed Cost (TFC)
The expenses that remain
constant regardless of the
level of production, such as
rent and salaries.
Total Variable Cost Total Cost (TC)
(TVC)
The sum of total fixed cost
The expenses that change and total variable cost,
as the level of production representing all costs
changes, such as raw incurred in the short run.
material and labor costs.
Average and Marginal Costs
Average Fixed Average Average Total Short-Run
Cost (AFC) Variable Cost Cost (ATC) Marginal Cost
(AVC) (MC)
The fixed cost per The total cost per
unit of output, The variable cost unit of output, The additional cost
calculated by per unit of output, calculated by incurred by
dividing total fixed calculated by dividing total cost by producing one more
cost by the quantity dividing total the quantity unit of output,
produced. variable cost by the produced. It is the calculated by taking
quantity produced. sum of AFC and the derivative of
AVC. total cost with
respect to quantity
produced.