Moving alongside the curve makes MRTS to decrease
Economics 2 credits Lecture # 12: Production in the short-run and in the long-run. Production calculations. 2012-2013
Production – is an activity directed to transfer economic resources into economic goods and services. There are three basic types of production: · Unit production · Mass production · Processed production
Factors of production can be:
Such division of factors creates two periods: · Short-run · Long-run
Short-run production function shows maximum possible amount of production which firm can reach changing quantity and combination of variable resources at given volume of fixed resources.
Three stages in the short-run:
Law of diminishing returns –
In the long-run all factors of production can be changed. Hypothetic example:
Isoquant – is a curve which shows set of all combinations of factors of production for a given volume of production. The slope of the curve is characterized by Marginal Rate of Technical Substitution. It shows how many units of labor is needed to substitute unit of capital for the same amount of production.
Real example: Oil transporting has two factors – tube diameter and pump’s output. For transporting 125,000 barrels of oil it is possible to use the following combinations:
Moving alongside the curve makes MRTS to decrease. Total costs of production of some good presents total payments for al factors of production and consist of total fixed costs and total variable costs.
In the long-run production all resources can be changed. This results in the fact that difference between fixed and variable costs disappears. The analysis considers LATC (longtime average total costs) and LMC (longtime marginal costs).
In a three-case model of SATC-LATC choice of a project is determined by forecasted market demand. Combining three parts of SATC curves with optimum volume of production produces LATC curve. If number of volumes of production tends to infinity, LATC curve becomes smoother. (Second graph)
The shape of LATC is determined by economies of scale:
Example below suggests a rough analysis of a firm’s production.
Total Sales = Price * Quantity Total Costs = Total Fixed Costs + Total Variable Costs Total Variable Costs = Variable Cost per Item * Quantity Operations Income = Total Sales – Total Costs After-Tax Income (Net Income) = Operations Income – Tax Rate * Operations Income
Sensitivity analysis for an investment project is a checking of a project’s profitability if some of the variable factors of a project will be different from those which were planned. This analysis can be easily made in MS Excel. When profitability equals zero this stands for break-even point. Economic analysis can be used to find break-even point in production and optimum amount of production.
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