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Understanding Short-Run and Long-Run Production in Economics

This tutorial delves into key concepts of production in economics, differentiating between short-run and long-run scenarios. It explains how at least one factor of production is fixed in the short run, while all factors are variable in the long run. The discussion includes total product, diminishing returns, marginal and average costs, and efficient scale. Additionally, it highlights the importance of cost curves, specifically in the context of Mankiw and Taylor's analysis. For further guidance, students are encouraged to attend office hours for personalized support.

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Understanding Short-Run and Long-Run Production in Economics

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  1. ECON100Tutorial 5 Rob Pryce www.robpryce.co.uk/teaching

  2. Question 1 • Short run: at least one factor production is fixed, while another can be varied. • Long run: all factors of production are variable. • Production factors: • Raw materials variable inputs • Labour variable inputs • Machinery • Factory Capital fixed inputs in the short run

  3. Question 2 Total Product Diminishing Returns to input Imagine labour and building a wall Input

  4. Question 3 TC = Costfixed + Costlabour Taken from Mankiw and Taylor, p.270

  5. Marginal Cost and Average Cost

  6. Question 5a

  7. Question 5b: production function additional workers have to share the production equipment work area becomes more crowded slope of the production function is the change in output from a change of one unit of input, which is the marginal product of labour

  8. Question 5c/5d Total cost is a constant fixed cost (£25) plus an increasing marginal labour cost

  9. Question 6a

  10. Question 6a/6b

  11. Question 6c Marginal Total Cost is just (ATCnow x Quantity) - (ATCbefore x Quantity) When MC is below ATC, ATC must be declining. When MC is above ATC, ATC must be rising. Therefore, MC crosses ATC at the minimum of ATC.

  12. Question 6d ATC = AFC + AVC TC = FC + VC Q Q Q

  13. Question 6e Six pairs of blue jeans. Efficient scale is the output that minimizes ATC. It is also the place where MC crosses the average total cost curve.

  14. Question 7 • Important points: • Short-run cost curves are easy to do • In the long-run there are no fixed costs • For more guidance on answer, see Mankiw & Taylor, pp. 278-9 Next week: Perfect Competition – so don’t worry about this for now!

  15. Any Questions? Email me Come to my office hour (12:30)

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