Description
This video explains the basics of production analysis, focusing on the short run. We first learn how to draw the Average and Marginal productivity, and the explain what the output elasticity is.
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The short run is considered the period of time where fixed costs are still fixed, which basically means that, if you have a factory, you have to make do with it because you can neither sell it, nor make it bigger, nor rent half of it: you are stuck with it for the time being. Capital is also considered fixed, meaning that, in the short run, all you can play around with are your variable costs, being labour the most commonly used variable cost.
In the video, three phases are shown. In phase I, average and marginal productivity increase with each added unit. Phase I ends in the extensive margin (or technical optimum), being this the line that splits phases I and II. Phase II is where we should ideally be: average productivity drops with each added unit, but marginal productivity is still positive. The line that separates phases II and III is called the intensive margin (or technical maximum), from which there will be too much variable input for each level of fixed input. When marginal productivity becomes negative, we enter phase III, and we should consider reducing labour.
Learn more by reading the dictionary entry.
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