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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.