Vocabulary

Using your dictionary, match words in A with their synonyms in B. А В

1. production a) sum

2. kind b) rise

3. capital c) to hire

4. amount d) manufacture

5. firm e) employee

6. increase f) to fall

7. to decline g) investment h) to employ h) director

i) worker i) type

j) manager j) company

Reading

1. Read text 27.

TEXT 27

PRODUCTION IN THE SHORT RUN. TOTAL PRODUCT

We begin the analysis of production in the short ran with the simplest kind of short-run situation: only one variable input and one fixed input:

Q = f(L, K)

The firm has chosen the level of capital (made its investment decision) so capital is fixed in amount. Once the level of capital is fixed, the only way the firm can change its output is by changing the amount of labour it employs.

Suppose a firm with a production function of the form Q = f(L, K) can, in the long run, choose levels of both labour and capital between 0 and 10 units. A production function giving the maximum amount of output that can be produced from every possible combination of labour and capital is shown in Table 4.1. For example, from the table, 4 units of labour combined with 3 units of capital can produce a maximum of 325 units of output; 6 labour and 6 capital can produce a maximum of 655 units of output; and so on. Note that with zero capital, no output can be produced regardless of the level of labour usage. Likewise, with zero labour, these can be no output.

Once the level of capital is fixed, the firm is in the short run, and output can be changed only by varying the amount of labour employed. Assume now that the capital stock is fixed at two units of capital. The firm is in the short run and can vary output only by varying the usage of labour (the variable input). The column in Table 4.2 under 2 units of capital gives the total output, or total product of labour, for 0 through 10 workers. This column, for which K=2, represents the short-run production function when capital is fixed at two units.

Table 4.1

A Production Function

Units of capital (k)

	0	1	2	3	4	5	6	7	8	9	10
0	0	0	0	0	0	0	0	0	0	0	0
1	0	25	52	74	90	100	108	114	118	120	121
2	0	55	112	162	198	224	242	252	258	262	264
3	0	83	170	247	303	342	369	384	394	400	403
4	0	108	220	325	400	453	488	511	527	535	540
5	0	125	258	390	478	543	590	631	653	663	670
6	0	137	286	425	523	598	655	704	732	744	753-
7	0	141	304	453	559	643	708	766	800	814	825
8	0	143	314	474	587	679	753	818	857	873	885
9	0	141	318	488	609	708	789	861	905	922	935
10	0	137	314	492	617	722	809	887	935	953	967

Table 4.2

Total, Average, and Marginal Products of Labour (with capital fixed at two units)

(1) Number of workers (L)	(2) Total product (Q)	(3) Average product (AP= Q/L)	(4) Marginal product (MP=∆Q/∆L)
0	0	-	-
1	52	52	52
2	112	56	60
3	170	56,7	58
4	220	55	50
5	258	51,6	38
6	286	47,7	28
7	304	43,4	18
8	314	39,3	10
9	318	35,3	4
10	314	31,4	-4

These total products are reproduced in column 2 of Table 4.2 for each level of labour usage in column 1. Thus, columns 1 and 2 in Table 4.2 define a production function of the form Q - f(L, K), where K=2. In this example, total product (Q) rises with increases in labour up to a point (nine workers) and then declines. While total product does eventually fall as more workers are employed, a manager would not (knowingly) hire additional workers if he knew output would fall. In Table 4.2, for example, a manager can hire either 8 workers or 10 workers to produce 314 units of output. Obviously, the economically efficient amount of labour to hire to produce 314 units is 8 workers.

2. Comprehension check.

Are the following statements true or false? Correct the false ones.

a) Once the level of capital is fixed, changes in output must be accomplished by ' changes in the use of variable inputs.

b) No output can be produced with zero workers.

c) Seven units of labour combined with five units of capital can produce a maximum of 559 units of output.

d) A manager could employ additional workers if he knew output could fall.

e) The economically efficient amount of labour to hire to produce 286 units is eight workers.

Discussion

Work in small groups.

Discuss the maximum amount of output that can be produced by each amount of labour

when combined with the fixed inputs.