Prior to beginning work on this discussion forum, read Chapter 7 of the textbook. Sarah owns a bakery that has four ovens, one full-time exempt administrative employee, and eight part-time hourly bakers.
Based on this information, respond to the following:
- Distinguish between the short run and the long run. What will differentiate the short run and the long run?
Long run and short run in economics are used in relation to production. In economics, short run is a period of time when at least one of the factors of production is fixed. Long term refers to a period that is long enough to allow all factors of production to become variable. The long run and the short run in microeconomics are entirely dependent on the number of variable and/or fixed inputs that affect the production output. For example, the salary of an employee remains fixed in the short run – for the initial years of their employment. In the long run, the salaries will change when the contract is reviewed.
- Describe fixed inputs and variable inputs. Which inputs are fixed, and which are variable in Sarah’s bakery?
A fixed input is a productive resource that cannot be changed, and their costs are known as fixed costs. For example, buildings and equipment are fixed inputs in production. They are resources whose costs do not change regardless of the level of output. On the other hand, variable inputs are resources that change according to the level of output. A high level of productivity results in increased variable inputs, but fixed inputs remain the same. Labor costs are examples of variable costs because more employees are needed when the productive capacity of the organization increases.
- Why would marginal productivity decline after a certain level of production?
The concept of diminishing marginal productivity refers to a situation in which the rate of increase in total output reduces after a certain level of production. Increasing some types of inputs while holding other levels of inputs constant will increase the level of output until production reaches an optimal level where an increase in inputs will cause a decline in output. Marginal productivity declines beyond a certain level of production because increasing variable inputs beyond a certain level will result in increased costs and inefficiencies. For example, when preparing cakes in a bakery adding employees beyond a certain level will increase salaries without increasing output when the available ovens are running in full capacity. Additional variable inputs become unproductive after some point.
- How can this problem of diminishing returns or marginal productivity be reduced or removed?
The problem of diminishing marginal productivity can be reduced by acquiring more fixed assets to increase production capacity. Another approach is to improve operational efficiency of variable inputs to increase productivity. Diminishing returns may also be removed by reinventing the system or adjusting the old one through innovative ways to increase productivity.
