An example of variable factors of production would be. Fixed and variable factors of production
To carry out production activities, a company needs production factors, the main ones of which are labor, capital, land (natural resources).
The factors used in production are divided into permanent (fixed) And variables. The first include those quantitative scales whose application cannot be changed in a given time period. Variables include the applied production factors, the quantitative composition of which can be changed in a given time period.
If all production factors are available, then, other things being equal, the volume of output will depend on the number of input factors. The relationship between the volume of output and the number of input factors is expressed
production function: Q = f(x1, x2…, xn).
Where Q is the quantity of products produced; x1, x2, …, xn – factors of production used.
Any production function has a number of properties.
1. Production function - a model of a specific technology. It determines what contribution each resource makes to the creation of the finished product. New technology - new production function.
2. The production function is a model of efficient production. That is, it describes what the maximum possible output can be with the expenditure of a given amount of resources. Or (which is the same thing) what is the minimum extremely important amount of resources for the production of a given volume of output.
3. The production function is based on the complementarity and interchangeability of resources. For example, the “capital” factor complements the “labor” factor, merging with it in a single production process. And, at the same time, it can replace it: more mechanized production requires fewer workers.
Each of the available production technologies corresponds to a number of specific combinations of factors used. Let us assume that a certain specific technology allows the use of four combinations to achieve a given volume of production (for example, 10 units of production), and the time interval within which it is carried out allows changing the quantitative ratio of two production factors - labor L and capital TO. The essence of these combinations is as follows: 1) 5L and 2K; 2) 3L and ZK; 3) 2L and 4K; 4)1L, and 6K . Let's transfer this data to the chart.
| A |
| IN |
| WITH |
| D |
| Q=10 |
| L |
| K |
Rice. Isoquant
Connecting the dots A, B, C And D, we get a curve called output isoquant 10 units of production.
An isoquant (iso - the same, quant. - quantity) is a curve on which the points show different combinations of factors used, which produce the same volume of output.
According to the law of the production function, a change in the quantity of one of the factors causes a unidirectional change in the volume of production. The total amount of product produced with a certain amount of a variable factor and other factors remaining constant is aggregate (total) TR product this variable factor.
To characterize the product obtained by increasing the consumed variable factor, concepts such as average and marginal product are also used. Average product of the variable factor of production AP L is the ratio of the total product of a variable factor to the amount of this factor used. For example, if the changing factor is labor, then the formula for the average product will look like this: AR = TP/L. Essentially, this formula shows labor productivity.
The marginal product of a variable production factor MPl is the increase in total product achieved by increasing this factor by one additional unit.
There are discrete marginal product and continuous marginal product.
Discrete marginal product is defined as the difference between the output when using n units of a variable resource and the output when using n-1 units of a variable resource. If we again call labor as a variable factor, we can write: MPL = ΔTP/ΔL, where ΔTP is the change (increase) in the volume of output ΔL is the increase in labor as a production factor by one additional unit. The marginal product characterizes the marginal productivity of a variable factor of production, ᴛ.ᴇ. the productivity of the last additional unit of this factor involved in the production process (in our example, the last worker involved in the production process), and the average product is its average productivity.
Continuous marginal product is mathematically defined as the first derivative of the total product function.
TP = f(L,K = const).
MP = f((L, K = const) = dTP/dL
Since the derivative of a function shows the rate of change of the function itself, the marginal product expresses the rate of change in output when the amount of a variable resource changes. We emphasize that the concept of marginal product, in contrast to average product, makes sense only for a variable resource.
Enterprise (firm) as an economic entity. Types of enterprises. An enterprise (firm) is an independent economic unit that has the right of a legal entity, owning a certain set of production factors for the production and sale of material... [read more]
To carry out production activities, a company needs production factors, the main ones of which are labor, capital, land (natural resources). Factors used in production are divided into constant (fixed) and variable. To the first...
There is specificity in the analysis of the production process depending on the firm’s ability to change the quantity and structure of resources used. In this regard, the concepts of short-term and long-term production periods, constant and variable resources are distinguished.
IN short term The firm cannot change the value of at least one of the factors of production it uses. IN long term the amount of all used resources changes.
Fixed factors of production- these are resources the quantity of which the company is not able to change in the short term (usually land, production space, machines and equipment).
Variable factors of production- these are resources, the quantity of which changes over a short period, i.e. in case of production necessity, the company is able to quickly increase or reduce their volume (for example, labor and raw materials).
In the short term, a firm can expand its production volume only by changing the quantities of resources used (labor, raw materials).
In the long run, growth in output results from the firm's increased use of all resources.
Short run production function reflects the amount of output that a firm can obtain as a result of changing the amount of a variable resource used, provided that all other resources remain constant. To analyze how changes in a variable factor of production affect the volume of output, indicators of total (gross, total, total), average and marginal products are used.
General Product (TP x X- this is the output in physical units that a firm will produce with a certain amount of this factor and given constant factors of production.
Let us assume that only two resources are used in production: labor and capital. In the short run, capital (production capacity) does not change, so output depends on the amount of labor used. The total product of labor will be the amount of output that the entrepreneur will receive with a given number of company personnel and given production capacities.
Average product (AP x) variable factor of production X shows the volume of production in physical units, which falls on average per unit of this resource:
Having calculated this indicator, the entrepreneur will know how much production on average one of his employees produces, i.e. how efficiently labor is used.
Marginal product (MP x) variable factor of production X- this is the increase in the total product that will be obtained as a result of the use of its additional unit and with a constant number of constant factors of production:
(7.6)
The marginal product characterizes the efficiency of using additional units of a variable factor of production, its marginal productivity (return).
A characteristic feature of the production process in the short term is that an increase in the amount of a variable factor of production, provided that the remaining resources used remain unchanged, is accompanied by a decrease in the growth and absolute value of the firm's total product. In economic theory, this pattern is called law of diminishing marginal productivity (or diminishing marginal returns).
The effect of this law is explained by the imbalance between the constant and variable resources used in production, which is why, from a certain point, the marginal product of the variable resource begins to decrease.
The dynamics and relationship between total, average and marginal products are presented graphically in Fig. 7.2.
 |
Rice. 7.2. Curves of total, average and marginal products of labor
Rate of change in total product (slope of the curve) TP) reflect the dynamics of marginal labor productivity. If the marginal product of labor increases, then total output increases at an increasing rate. A feature of this stage is the low intensity of capital use. This means that an increase in the amount of labor used is accompanied by an increase in the contribution of each new worker to the total volume of production.
When the marginal product of labor is still positive but is already falling, the total product increases at a decreasing rate. When the marginal product of labor is zero, the total product of the firm is at its maximum. Further, marginal productivity becomes negative, and output begins to decrease.
Like the marginal product, the average product of labor first increases, reaches a maximum value, and then decreases (see Figure 7.2).
2.1. The source of economic profit can be:
a) advanced technology;
b) reward for entrepreneurial talent;
c) a) and b are correct;
d (*answer to the test*) all the listed answers are incorrect.
2.2. The constant factors of production for a firm are:
a) not affecting the demand for this product;
b (*answer to test*) fixed for different output;
c) with a constant price;
d) determined by the size of the firm.
2.3. An example of variable factors of production could be:
a) electricity, c (*answer to test*) a) and b are correct);
b) raw materials; d) all of the above answers are incorrect.
2.4. At the point of minimum marginal cost, average cost must be:
a) decreasing; c) permanent;
b (*answer to test*) increasing; d) minimal.
2.5. Which of the following is characteristic only of a corporation:
a) involvement of hired managers in management;
b) division of profits between the owners of the company;
c) payment of dividends;
d (*answer to test*) use of hired labor?
2.6. An entrepreneur who is busy replicating videos
cassettes, rents premises for 0.5 million rubles. per year; used by him
own equipment worth 1 million rubles. wears out over
year. When he worked as a salesman in a technical goods store,
his annual salary was 2.5 million rubles. per year; Having gone into business, he began to receive income (accounting profit) in the amount
4 million rub. What are its external costs and economic
earnings, if the real interest rate in Sberbank is at
approximately 100% per annum:
a (*answer to test*) 1.5 million, no economic profit;
b) 3 million; 4 million;
c) 0.5 million; 3.5 million,
d) 0.5 million, no economic profit?
2.7. At what price level will the firm whose costs are shown on the graph not continue to produce:
a) (*answer to test*) P1 only; c) P1, P2, P3;
b) P1 and P2; d) at all specified levels?
2.8. A change in the price of one of the factors of production will affect the firm's costs as follows:
a) average costs will necessarily change;
b (*answer to test*) marginal costs will necessarily change;
c) average and marginal costs will change;
d) nothing will change.
2.9. The firm's supply curve coincides with the curve:
a (*answer to test*) average costs to the right of the marginal cost curve;
b) average costs to the left of the marginal cost curve;
c) marginal cost above the average variable curve
costs;
D) marginal cost is above the average total cost curve.
2.10. Which of the following formulas is correct:
a) accounting profit + internal costs = economic profit;
b) economic profit - accounting profit = external costs;
in (*answer to test*) economic profit + internal costs = accounting profit;
d) external costs + internal costs = revenue?
All resources used by a company in the production process are conventionally divided into two classes: constant and variable:
Resources, the quantity of which does not depend on the volume of output and is constant during the period under consideration, are called constants . This may include: production facilities, special knowledge of highly qualified personnel, technology and know-how.
Resources, the quantity of which directly depends on the volume of output,are called variables. Examples of variable resources include electricity, most types of raw materials and materials, transport services, labor of workers and engineering personnel.
Short and long term
Dividing resources into constant and variable allows us to distinguish short-term and long-term periods in the company's activities.
The period during which the firm is able to change only part of the resources (variables), while the other part remains unchanged (constant), is called the short-term period. In the short run, the firm's output depends solely on changes in the variable input.
The period during which a firm can change the amount of all resources it uses is called the long-run.
The duration of the short-term and long-term period may not be the same in different areas of production. Where the volume of permanent resources is small, and the nature of production makes it easy to change permanent resources, the short-term period lasts no more than a few months (garment, food industry, retail, etc.). For other industries, the short-term period can be 1-3 years (automotive industry, aircraft manufacturing, coal mining) or even 6 to 10 years (electric power industry).
The activity of a company in the short term can be characterized using the short-term production function: , where is the amount of a constant resource, is the amount of a variable resource.
The short-run production function shows the maximum amount of output that a firm can produce by changing the quantity and combination of variable inputs, given the amount of fixed inputs.
Production in the short term. The law of diminishing returns.
Since different amounts of time are spent on changing the amount of resources used in the production process, it is necessary to distinguish between short-term and long-term periods . Short term - during which the enterprise cannot change its production capacity, but at the same time sufficient to change the degree of intensity of use of these fixed capacities. The production capacity of the enterprise remains unchanged within the short term, but the volume of production can be changed by using more or less human labor, raw materials and other resources. Existing production capacities can be used more or less intensively within the short term.
When analyzing production costs, it is important to consider the actionlaw of diminishing returns , which states that,starting from a certain point, the successive addition of units of a variable resource (for example, labor) to a constant fixed resource (for example, land) gives a decreasing additional, or marginal, product per each subsequent unit of the variable resource.
law of diminishing returns in general:If one of the factors of production is variable and the others are constant, then starting from a certain point, the marginal productivity of each subsequent unit of the variable factor decreases. A decrease in marginal productivity means nothing more than an increase in marginal costs. After all, if each subsequent unit of a variable factor increases the volume of output by an amount less than the previous one, then to increase the volume of production for each additional unit, an increasing number of units of the variable factor are required. Consequently, marginal cost increases, although the unit price of the variable factor remains unchanged.
A variable factor is a factor of production, the need for which can increase or decrease in a relatively short period of time. An example of a production factor is resources for which business needs change over time: raw materials for the production of a particular product, electricity, labor. These factors are called variables because due to economic changes, which can occur relatively frequently, the demand for these factors may change. For example, the amount of labor needed will depend on how well the company is doing, the level of electricity consumption will depend on the volume of work, which, of course, is not constant, and so on. The importance of variable factors for business economics is quite large, because variable factors influence almost all sectors of production.
The importance of variables for business
The first value of variable factors is their direct impact on the expense items of the enterprise’s budget, because payment for variable factors is always associated with costs for the company. Consequently, an increase or decrease in the cost of variable factors will directly affect the company's expenses. What consequences could this lead to?
If the cost of a variable factor increases (for example, an increase in the cost of electricity as a result of rising tariffs), then the company's expenses for paying for this factor will increase. As a result of increased costs, final products will also increase, and this will lead to a partial reduction in the consumer audience. It turns out that the variable factor will first increase the company’s costs, and then also reduce the number of potential buyers of the manufactured products.
Second meaning. The dynamics of changes in the cost of variable factors will allow you to make a relatively accurate judgment about the further development of a particular business. After all, if, suppose, a company has to buy variable factors at increased prices, this may increase so much that it will be forced to leave the market (no one will buy too expensive goods). Therefore, if there are prerequisites for an increase in the cost of variable factors, this makes entrepreneurs wary.
The final variable worth considering is its impact on economies and states. Variable factors need to be considered not only from the perspective of microeconomics, but also at the macroeconomic level. Let us give an example with such a variable factor as labor.
If a large number of workers suddenly become unnecessary, if they are fired en masse, this could lead to internal unrest and even revolutions in the country. In developing countries, a similar phenomenon can be observed quite often, because the introduction of innovative technologies gives rise to mass layoffs.
Stay up to date with all the important events of United Traders - subscribe to our