Production in the Long Run - Essay Example

Production in the Long Run Production function relates to the quantity of factors input and the quantity output thatresults. There are three measures of production; total product, average product and marginal product. In the case of total product, the total amount of output generated for the business is intangible. Most manufacturing companies fall under this class, for example, the motor vehicle industry and DVD players. In total product, it is difficult to measure the amount of output. With the average product, the total output divided by the output per capital employed. When it comes to marginal product, change in production is registered after the addition of capital employed. (Steinemann 11) This could be an added employee. The major point about the long run is that all the factors pertaining to production are assumed to be variable. The term ‘Returns to Scale’ is a term used to refer to the process by which a firms output, responds to change factors input. An example of this is as outlined in the table below; Labor Input Plant 1 Plant 2 Plant 3 Plant 4 10 40 100 130 150 20 100 120 150 173 30 120 140 175 199 40 130 170 200 231 50 150 190 230 260 Capital Input 10 20 30 40 Courtesy of (http://tutor2u.net/) From the above chart, Plant 1, business increases to 40 working with labor input 10 and capital input of 10. This demonstrates increase in returns to scale, resulting to a fall in the total cost of production. Generally, the scale of production can be increased or reduced. This is due to the variability of all factors. As a result, the firm moves to new average cost curves. Every firm has an equivalent short run average cost curve, with the firms’ expansion, it moves on to different short run average cost curves. Economies of scale result after the expanded scale output leads to a lower average cost for each level of output. The overhead costs relative to the running costs will probably be high in industries where big networks and national distribution are necessary. This leaves only little room for the company to exploit the returns of scale available in the market. When the cost disadvantage of operation is small, the companies/firms may operate at a profit. This also happens in price differentiation allowing small suppliers to sell their produce at premium price to the market average, on the advantage, willingness and ability for the consumers to pay high prices to cover the cost per unit. A high level of industry concentration is likely, where the minimum efficient scale of production is high as compared to overall market demand. The time duration required for the long run id different from one sector to another. For example, in the nuclear power industry, it can take so many years to commission a new power plant or improve capacity. The law of diminishing marginal returns is the only critical difference between long run and short run (Tutor2u par 4). This law only applies to short run, which has a fixed output unlike the case of long run where it’s output are variable. Difference between the short and long run could differ depending on the period; some producers may operate at short run over a minimal period while others may operate at short run over a long time. Variability in the long run also applies to the quantity of capital. This means that, the company can not only adjust manpower in the industry but can also increase the size of the factory. For example, if the currently used factory is used beyond capacity, then a bigger one is constructed in the long run to accommodate more output. In the case where the factory has used space, it is possible to relocate to a smaller factory in the long run. The major concerns in the long run production, is how producers adjust the inputs under their control considering changes in prices. All production activities include input that is beyond the producer’s control. This includes the Government and its regulations, forces of nature, weather, and social customs and institutions. These variables are not fundamental to understanding the market supply principles. Returns to scale guides the resulting change in production in case a producer changes all its output proportionally. To begin with, there will be an increase to production proportionally to the increase in inputs. Secondly, the increase in input might result to a relatively higher increase of production. Thirdly, with the increase in inputs, there might be a decrease in production. The first case can also be termed as constant returns to scale. The second situation can be termed as decreasing returns to scale. On the other hand, the final case defines increasing returns to scale. When there is consistent rises in all inputs, it results in an equal proportional increase in production, resulting to constant returns to scale. In the case where proportional increase in all inputs within the control of an organization produce a greater than proportional increase in output, there occurs a fall in returns to scale. Say as an example, if labor increases by ten percent, then the outcome production will be higher than 10 percent. In the event where proportional increase in all inputs in an organization’s control leads to a less-than- proportional rise in output, there is a fall in return to scale. Unfortunately, there is only little light shed on the long run production analysis on the positive law of supply relation between quantity and price. Taking into consideration the short run, diminishing marginal returns shows a higher production cost, and thus a higher price. This corresponds with greater production, thus the law of supply. In the long run, due to the flexibility of the returns to scale, in that they can increase, decrease or remain constant, the production cost can also vary in that it can also increase, decrease or remain constant. Analyzing the long run production is the first step towards understanding the supply market. Other steps are the market structure, cost of long run production where a firm operates. When dealing with the cost of production as a single item, the general understanding of the market supply builds on the long-run output analysis and the main role played by returns to scale. Since production of the input that can be varied can rise, fall or remain the same, an insight to the law of supply’s applicability is obtained. With regards to the market structure, its especially with the resulting market control of each firm and the degree of competition. In the long run, markets, with limited control over the price, have a tendency of producing output by making equal price and marginal cost. Markets that are not so competitive and enjoy greater market control, should not equate price with marginal cost. Economies of scale and diseconomies of scale are two fundamental long run concepts in understanding the long run cost. With the economies of scale, proportional increase in all outputs, a firm experiences decrease in the long run average cost. There is a decline in the average cost of production if production increases more than input increase. When referring to the diseconomies of scale, a firm experiences an increase in the long-run average cost as a result of proportional rises in every input. The mean cost of output rises with more increase in input than production cost. According to Nobel Laureate (Finn Kydland 2011), most people and especially the government tend to focus more on short-term issues rather than those in the long run. Long run according to most economists, is more important than short run. For years now, the U.S. government and European governments have done this. Not a very surprising outcome, becoming obvious that the government’s are not behaving very consistently over time, becoming even harder predicting what they are going to do in the future. Important decisions, driving long-run growth, new productive capacity investments, processes of production and innovation, and new products. It applies in entrepreneurship. Kydland further states that, small companies and entrepreneurs are the key to long run growth. Large firms also have long run growth but tend to collapse with time due to the overall large input. In the long run competitive firms enter the industries with excess profits (economic profits greater than zero), meaning that price is greater than long run total cost. Similarly, in the long run, competitive firms exit the industries experiencing loses (economic profits less than zero), price is less than long run average total cost. This result to competitive forces, pushing economic profits to zero. Long run equilibrium in an industry with free entry and exit, and earning economic profits equal to zero, operate at the minimum point of the cost curve. This results to the breakeven point with zero economic profit. In the case of producer surplus, there is the net benefit to the producers, likewise to the consumer surplus. In order for producers to acquire the producer surplus, they often receive a greater than minimum price they would require to supply a certain amount of goods. In better terms, the producer surplus is the difference between the minimum total revenue that a producer should get and the amount that he actually gets. The amount of producer surplus changes with change in price or quantity of a commodity. There is however, a difference between producer surplus and profits. Profits calculated from the total revenues then subtracting the total cost. This is not the case with the producer surplus whereby, total variable costs are subtracted from the total revenues. Economic rent is a term used to refer to the producer surplus in the long run, this is the return earned by an input factor in excess of the minimum return required to supply that factor. In other words, rent is the payment given to a factor of production in excess of opportunity cost. In conclusion, long run involves a lot of planning and implementation. A firm decides to go large with the adding of a new product line or even building a new plant. To ensure there is quality and maximum production, new technologies are employed to fore see the general production and to ensure good of the highest quality are maintained. Maintaining Least cost-combination input for the desired amount of output. After all the decisions are put to table, production begins. Long run production is the most preferred as everything is put into place, before production begins and later on everything else falls into place. The results are satisfactory and the profits enjoyed in large amounts. Works Cited Tutor2u. “Long run costs of production” Academic Search Premier. http://tutor2u.net/economics/content/topics/buseconomics/longrun_costs.htm AmosWEB LLC, 2000-2011, long-run production analysis. Web http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=long-run+production+analysis Anne C. Steinemann, Microeconomics for Public Decisions. Book Wharton, Linking Theory to Current Economic Woes. 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