Presentation on theme: "1 Time Frame of Production We talk about two basic time settings for production – the short run and the long run."— Presentation transcript:
1 Time Frame of Production We talk about two basic time settings for production – the short run and the long run.
2 Production cost u We will consider cost over two different time frames: l short run and l long run. u We will distinguish between two types of inputs: l variable and l fixed.
3 The input called capital u The main capital good of a firm is typically the plant or production facility. u It takes time to physically alter the plant so that the level of output can be changed.
4 Examples of plant adjustment u How long would it take to alter a restaurant facility? l 6 months? u... to alter an automobile factory? l 2 years? u Each production setting is likely to have a different time frame to alter the production facility.
5 The short run u The short run is that time period in which at least one input can not be changed or altered as output changes. u So, at least one input is fixed in the short run and the rest can be variable inputs.
6 The short run - continued u We typically think of the plant as the fixed input. The short run is that time frame right up to the time it takes to alter the plant.
7 The long run u The long run is the time frame longer or just as long as it takes to alter the plant. u Thus the long run is that time period in which all inputs are variable.
8 Costs The short run means we have at least one fixed input and we have variable inputs (or maybe just one variable input). Thus, in the short run we will have fixed costs and variable costs. In the long run we have only variable inputs. Thus, in the long run we will have only variable costs.