7.2 Production in the Short Run

Production is the process a firm uses to transform inputs (e.g., labor, capital, raw materials, etc.) into outputs. It

is not possible to vary fixed inputs (e.g., capital) in a short period of time. Thus, in the short run the only way to

change output is to change the variable inputs (e.g., labor). Marginal product is the additional output a firm

obtains by employing more labor in production. At some point, employing additional labor leads to

diminishing marginal productivity, meaning the additional output obtained is less than for the previous

increment to labor. Mathematically, marginal product is the slope of the total product curve.

7.3 Costs in the Short Run

For every input (e.g., labor), there is an associated factor payment (e.g., wages and salaries). The cost of

production for a given quantity of output is the sum of the amount of each input required to produce that

quantity of output times the associated factor payment.
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