Introduction
Short-run production is an important term in economics that represents the time when enterprises operate with fixed inputs such as capital and land. Variable information, on the other hand, such as labor and raw materials, may be altered. This stage presents various organizational issues, including identifying the ideal amount of variable inputs, defining output level, and allocating fixed expenses. This essay will examine the short-run production decision-making process, its intricacies, and how businesses may utilize economic theory to make educated judgments that optimize profitability. The link between short-run and long-run output will also be discussed, and how organizations must modify their decision-making process when inputs change.
Short-Run Production Decision Making
Short-run production decision-making is complicated because enterprises must make trade-offs between production output and costs. Firms must make critical decisions, such as choosing the appropriate level of variable inputs, such as labor and raw materials, to employ in order to maximize profit. The marginal product of work and the marginal product of capital establish the optimal amount of variable inputs (Khoroshko & Kuznetsov, 2020).
In addition to the decision-making process addressing the optimal amount of variable inputs, enterprises must make other crucial judgments in the near term. One key consideration is establishing their production level. The production narrative is bound by the firm’s fixed inputs, such as money and land, and its production function (Khoroshko & Kuznetsov, 2020). Companies must select how much of their adjustable resources, including workforce and raw materials, they can utilize to achieve the required output level.
Another crucial choice that enterprises must make in the near run is how to allocate their fixed expenses. Fixed expenses, such as rent and machinery, are expenditures that do not vary with production (Khoroshko & Kuznetsov, 2020). Companies must select how much of their fixed expenses to assign to each unit of work. This decision might be difficult since the condition of output impacts the average fixed cost per unit.
Companies must reconcile their aim to minimize average fixed costs with their drive to increase profit (Khoroshko & Kuznetsov, 2020). The fact that enterprises must cope with both constant and variable inputs complicates decision-making in short-run manufacturing. The theory of decision-making in economics provides a framework for organizations to make optimum decisions while accounting for their production function, information costs, and income.
Reflection of the Decision-Making Theory
To illustrate how the theory of decision-making is reflected in short-run production, consider the following hypothetical case of a firm that produces furniture. The firm has a fixed input of capital, such as machinery, and a variable input of labor, such as carpenters. The firm’s production function is given by Q = 10L^0.5K^0.5, where Q is the quantity of furniture produced, L is the quantity of labor used, and K is the quantity of capital used. If the hourly salary for carpenters is $20 and the hourly cost of capital is $50. The company’s purpose is to increase profits. To do this, the company must decide how much labor to recruit.
Using the production function, the marginal product of labor is given by MPL = 5L^(-0.5)K^0.5. Suppose that the firm has 100 units of capital. The marginal product of labor when the firm employs one carpenter is MPL = 5(1)^(-0.5)(100)^0.5 = 25. Therefore, the firm should continue to hire carpenters as long as their wage rate is less than or equal to their marginal product. In this scenario, because the hourly pay is $20 and the marginal product of labor is 25, the company should recruit carpenters until their hourly wage hits $25.
Conclusion
Finally, decision-making theory provides a framework for enterprises to make optimum short-run choices while considering their operational framework, input costs, and income. Short-run production is essential for businesses to make informed judgments regarding their products and prices. Firms’ decision-making processes get increasingly complicated as they adjust to changes in inputs and shift to long-run production. Firms may make more good judgments and achieve their objectives if they comprehend these principles.
Reference
Khoroshko, L. L., & Kuznetsov, P. M. (2020). Management of short-run production. Russian Engineering Research, 40(12), 1107–1108. Web.