1. Short-run and long-run production theory – recap
Q5) Evaluate the differences between short-run and long-run production theory and explain how some firms can produce increasing returns to scale without buying more land or capital (e.g. they do more with what they’ve got)
Chapter 43

2. Short-run and long-run production theory
Q5) Evaluate the differences between short-run and long-run production theory and explain how some firms can produce increasing returns to scale without buying more land or capital (e.g. they do more with what they’ve got)

4. Production: short-run vs long-run
Simply put, short-run is when there is one fixed factor leading to physical constraints on production versus long-run where all factors are variable thus, in theory, there is opportunity for unlimited production
In the short-run, by increasing a variable factor input (e.g. labour) onto a fixed factor (e.g. a factory) you will eventually experience diminishing marginal and average returns
Firms seek to achieve economies, then constant, economies of scale in the long-run but try to avoid diseconomies of scale
Videos 10a and 10b will help support chapter overviews/

5. Short-run production theory
The theory of diminishing returns is a theory that covers what happens to firms to their Total Product / Average Product and Marginal Product (Product=physical output of things…..NOT cost)
TO/TP/TPP = literally the total amount of stuff you’ve made…
AP = 100 workers make total of 1000 cars per year. AP per worker is 100 cars per year (TO/quantity of inputs)
Marginal Product – the extra production from an extra unit of input (hiring one more person). So, if I hire workers and I get 1012 cars the MP is 12
Links – when MP starts to decline, TO/TP/TPP starts to slow
Links - when MP=<0 your TP/TO/TPP= declines
A key phrase for economics is ‘everything happens at the margin’
Business owners should know when these things start happen. When:
they start to get less back (in total) when they add more inputs (e.g. labour) = or when DR sets in
they need to know when adding the last new input (one more person) they get zero and/or less back than they got the time before = or when MPP=0
they need to know how productive their workforce is (how much on average are they making per day/month/year) = or their AP
businesses need to know when to stop, where to stop and how much they get (produce) when the decide to stop.

6. Visually seeing Production – TPP/TO; MP; AP
What is happening before ‘A’?
What is happening after ‘A’?
What has happened after ‘Y’?
What does after ‘B’ tell us?
What does after ‘C’ tell us?
What does ‘W’ tell us?

7. Production theory – tabular form
Fill in the gaps and circle/shade in the following:
The point of diminishing marginal returns (see ‘B’ on your diagram)
The point of diminishing average returns (see ‘C’ on your diagram)
The point where MR>0 and TO/TPP falls (see ‘Y’ on your diagram)

8. Now construct a scaled production chart using the completed chart information

9. Production theory – tabular form
Fill in the gaps and circle/shade in the following:
The point of diminishing marginal returns (see ‘B’ on your diagram)
The point of diminishing average returns (see ‘C’ on your diagram)
The point where MR>0 and TO/TPP falls (see ‘Y’ on your diagram)

11. Long run production theory
There are three possibilities in LR production theory. The firm is either in:
Increasing returns to scale – increasing inputs gives you more back in output (proportional to the change in inputs)
Constant returns to scale – an increase in inputs gives you the same proportionate increase in output
Decreasing returns to scale – an increase in input gives you a less than proportionate increase in output
THIS IS NOT ABOUT COSTS!!! IT’S ABOUT Q of UNITS/OUTPUT

12. Tackling the question
Read the case study in Chapter 43 about Petrol Stations
Can you think of any other businesses that have adopted similar approaches?
Read the importance of productivity here

13. Q5) Evaluate the differences between short-run and long-run production theory and explain how some firms can produce increasing returns to scale without buying more land or capital (e.g. they do more with what they’ve got)
Plan it out
Combine all of this information to tackle the question and plan out a strategy to answer it…..
Actually plan it out in lesson on the showbie PDF pro-forma in our classroom or in note form
Homework – do it!....please.
Challenge – time yourself 16mins.