Economics Short Run Vs Long Run Costs Questions
In the short run, average product (AP) impacts a firm's decision-making process by influencing its production and cost decisions. The average product is the output produced per unit of input, typically labor.
If the average product is increasing, it means that each additional unit of input is contributing more to the total output. This indicates that the firm is experiencing increasing returns to scale. In this case, the firm may choose to increase its production levels to take advantage of the higher productivity and potentially lower average costs.
On the other hand, if the average product is decreasing, it means that each additional unit of input is contributing less to the total output. This indicates diminishing returns to scale. In this case, the firm may choose to decrease its production levels to avoid incurring higher average costs.
Overall, the average product serves as a crucial factor in a firm's decision-making process in the short run, as it helps determine the optimal level of production and the associated costs.