Long Run Production Short Answers

In our short answers videos we take a topic and ask two short questions on it. In this video we look at the difference between short and long run production and then consider how diseconomies of scale can affect the profitability of a business.

How does the long run production function differ from the short run production function?

• In the short run, there is assumed to be at least one fixed factor input. This is usually the amount of land or capital available for production.
• In the long run, there are no fixed factors
• This means that a business can change the scale of production and also the long-run mix of inputs between labour and capital
• In the long run production function, we focus on the nature of the returns to scale i.e. if there are increasing returns, then economies of scale are being experienced

Explain how diseconomies of scale can affect the long run profitability of a business

• Diseconomies of scale mean that a firm is producing a level of output higher than the minimum efficient scale
• This leads to higher long run average costs arising from a loss of productive efficiency
• The likely result is that a firm is not producing at an optimum output and that total profits will be lower
• Profits will be squeezed by higher AC and also because the increased output might have to be sold at a lower price
• Draw an analysis diagram to illustrate this.