Production in the Long Run Essay Example | Topics and Well Written Essays - 2000 words

Production in the Long Run - Essay Example 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, th e 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 compa red 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 acc ommodate 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