Economics Short Run Vs Long Run Costs Questions Medium
The concept of marginal product refers to the additional output that is produced when one additional unit of input is added while keeping all other inputs constant. It measures the rate at which output changes with respect to changes in input.
In the short run, the relationship between marginal product and costs is crucial in determining the behavior of costs. Initially, as more units of input are added, the marginal product tends to increase, resulting in decreasing average costs. This is known as the law of diminishing marginal returns. However, at a certain point, adding more units of input leads to diminishing marginal product, causing average costs to increase. This is due to factors such as limited capacity or inefficiencies in the production process. Therefore, in the short run, the relationship between marginal product and costs is inverse, with marginal product initially decreasing costs and then increasing costs.
In the long run, all inputs are variable, allowing firms to adjust their production capacity. In this case, the relationship between marginal product and costs is different. As firms can adjust their scale of production, they can avoid the diminishing marginal returns that occur in the short run. This means that in the long run, firms can achieve economies of scale, where increasing output leads to decreasing average costs. This is because spreading fixed costs over a larger output reduces the average cost per unit. Therefore, in the long run, the relationship between marginal product and costs is positive, with marginal product leading to decreasing costs.
Overall, the concept of marginal product is closely related to short-run and long-run costs. In the short run, diminishing marginal returns cause costs to increase after a certain point, while in the long run, firms can achieve economies of scale and decrease costs as output increases.