Short-Run Production and Costs

Short-Run Production and Costs

The purpose of this section is to discuss the underlying work of firms in the short-run – the

production of goods and services. Why is understanding production important to understanding

firm behavior? Recall that firms are profit maximizers. We learned in the last chapter that profit

equals the difference between total revenue and total costs. As you will learn below, production

affects costs. Hence, the first part of this chapter discusses production in the short-run while in the

second part we discuss how production affects costs and what those costs consist of in the shortrun.

I.

Production in the Short-Run

Recall that the short-run is a period of time during which the firm may be able to change some

of its inputs but cannot change all of them. At least one input, often capital but not always, is

fixed in the short-run, which limits the choices that firms may make. In this section, we will

discuss in detail how production works in the short-run.

A. The Production Function

Recall that in the previous chapter we discussed the production function, which illustrates

the relationship between output (Q) and inputs (L, K, N, E):

Q = f(L, K, N, E)

(1)

The main point of this section is to discuss the exact nature of the relationship between the

inputs and the output. To do that, we must first simplify the production function. The first

step of the simplification is to assume that we are talking about a very simple production

process. The one we will use is cleaning out irrigation ditches. Cleaning irrigation ditches

is a production process that I was involved in as a teenager and requires only two inputs –

capital (shovels) and labor (teenagers). Since we are in the short-run, at least one input

must be fixed. For our example, we will assume that the number of shovels is fixed while

the firm can change the amount of labor. Thus, our production function becomes:

Q = f(L, K )

(2)

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