| Short run | It is the time period when at least one factor of production is fixed in supply, so the only way to raise output is by adding more of the variable factors |
|---|---|
| Long run | It is the time period when every factor of production is variable and all factors can be used to increase output |
| Production function | The link between the amount of production factors' inputs and the final product |
| Law of diminishing returns | The return to the variable factor will gradually decrease if larger quantities of the variable factor are added to fixed quantities of other factors |
| Total physical product (TPP) | The maximum quantity of output that can be generated from a given set of inputs |
| Average physical product (APP) | The output per unit of the variable factor of labour i.e., APL= TPL/ QL. |
| Marginal physical product (MPP) | Additional output that results from hiring an extra worker i.e., MP= ∆Q/∆L |
| Fixed costs | The costs of a fixed factor that do not change with production |
| Variable costs | The costs of the variable factor such as labour that fluctuate with the level of production |
| Average fixed cost | Fixed costs per unit of output i.e., AFC = FC/Q |
| Average variable cost | Variable costs per unit of output i.e., AVC = VC/Q |
| Average total cost | Total costs per unit of output or the sum of AFC and AVC i.e., AC = TC/Q or AFC + AVC |
| Marginal cost | Increase in total cost caused by a unit increase in output i.e., MC = ΔTC/ΔQ. |
| Increasing returns to scale | When there is a greater than proportionate increase in output for a given increase in factor input quantity |
| Decreasing returns to scale | When there is a smaller than proportionate increase in output for a given increase in factor input quantity |
| Constant returns to scale | When there is an equal to proportionate increase in output for a given increase in factor input quantity |
| Long run average cost (LRAC) curve | A curve that shows how average costs (costs per unit) vary as output changes during the time when the supply of all production inputs can be increased |
| Short run average cost (SRAC) curve | A curve that shows how average costs (costs per unit) vary as output changes during the time when at least one production factor is fixed in supply |
| Economies of scale | Decrease in LRAC as total production increases |
| Diseconomies of scale | Increase in LRAC as total production increases |
| Internal economies of scale | Decrease in LRAC as a result of the firm's own expansion of production |
| External economies of scale | Decrease in LRAC as a result of the industry's expansion |
| Merger | The method by which two previously unaffiliated companies combine to form a new company |
| Takeover | A takeover is when one company buys out another company, often known as an acquisition. |
| Horizontal integration | Mergers between firms that are manufacturing the same product or are at the same stage of production |
| Vertical integration | Mergers of firms involved in different stages of the production process |
| Conglomerate integration | Mergers between firms that produce unrelated items |
| Lateral integration | Mergers between firms that produce related items |
The production function provides us with the maximum amount of output a firm can produce, over a certain period of time, for each unique combination of inputs.
Q = f (land, labour, capital and enterprise)
Some of the factors or inputs are fixed in the short run, while others are changing over time. Regardless of the amount of output produced, fixed factors have a fixed quantity. Variable factors are those whose quantity varies when the output level varies. For instance, labour can be made to work longer hours.
The term "short-run" refers to a period of time during which at least one factor of production remains constant, implying that output can only be raised by increasing the variable factor of production.