The relationship between factors of production and the output of a firm is called a production function. The Short-Run Production FunctionĪ firm uses factors of production to produce a product. We examine long-run choices later in this module. Our analysis in this section focuses on the short run. Decisions that will affect operations over the next few years may be long-run choices, in which managers can consider changing every aspect of their operations. Their decisions over the next few weeks are likely to be short-run choices. The managers may be planning what to do for the next few weeks and for the next few years. The planning period over which a firm can consider all factors of production as variable is called the long run.Īt any one time, a firm will be making both short-run and long-run choices. Over those periods, managers may contemplate alternatives such as modifying the building, building a new facility, or selling the building and leaving the restaurant business.

While the managers of the restaurant are making choices concerning its operation over the next year, they are also planning for longer periods. A factor of production whose quantity can be changed during a particular period is called a variable factor of production factors such as labor and food are examples. For the restaurant, its building is a fixed factor of production for at least a year. When the quantity of a factor of production cannot be changed during a particular period, it is called a fixed factor of production.

Other factors of production could be changed during the year, but the size of the building must be regarded as a constant. Decisions concerning the operation of the restaurant during the next year must assume the building will remain unchanged. It would take at least that much time to find a new building or to expand or reduce the size of its present facility. For example, a restaurant may regard its building as a fixed factor over a period of at least the next year. The short run in this microeconomic context is a planning period over which the managers of a firm must consider one or more of their factors of production as fixed in quantity. Our analysis of production and cost begins with a period economists call the short run.

Marginal product of the last worker