Question

Economists use short-run production functions to describe how firms can change the rate of output they produce by using one or more variable inputs and at least one fixed input. Textbook examples usually assume that labor is a variable input and physical capital is a fixed input. Could physical capital be a variable input – an input that a firm would choose to vary in order to change its rate of output in the short run? Explain

Answer 1

Answer: In short run firms usually fix one input and vary the the input to produce an additional goods or services. Usually the level of capital is fixed in the short run and labor remain a variable input. For example, in a factory, in the short run, the firm usually add workers to produce an additional amount of goods and services and capital i.e machines, equipments etc remains fixed as it is expensive to replace or add machine in the short run and usually the additional wage paid to an additional worker becomes smaller than the additional expense of adding a new machine. However, this is not always the case. In case of education system, suppose in an university the number of professors usually remains fixed and it is usually expensive to hire an additional professor. However, the physical input such as new computer for the library, new desk, board is relatively cheap compared to the wage paid to an additional professor. Hence usually university management keeps the labor ie professors fixed in the short run and vary the physical inputs such as addition of computers,desks, boards in the short run to increase the efficiency of education. Hence here, labor becomes a fixed input and physical capital becomes a variable input in the short run.