POTENTIAL REAL GROSS DOMESTIC PRODUCT: The total real output (real gross domestic product) that the economy could produce if resources are fully employed. In other words, the economy is operating ON the production possibilities frontier. Full employment is generally indicated by achieving what is termed the natural unemployment rate, which is an unemployment rate in the neighborhood of about 5%. If the economy is at full employment then actual gross domestic product is equal to potential gross domestic product and the actual unemployment rate is equal to the natural unemployment rate. The macroeconomy is thus living up to its potential, at least in terms of producing wants-and-needs satisfying goods and services.
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The resources, or factors of production, used in the production of output by a firm. This term is most frequently associated with the analysis of short-run production, and is often modified by the terms fixed and variable, as in fixed input and variable input. The quantity of a variable input can be changed in the short run and the quantity of a fixed input cannot be changed. The relation between a variable input and output is of particular interest in the study of short-run production. This relation is noted as the law of diminishing marginal returns, which indicates that additional quantities of a variable input, when added to a fixed input, has a decreasing marginal product, or marginal returns.
In the short run, the quantity of a fixed input cannot be changed, meaning it cannot be used to expand output. The best example of a fixed input for most short-run production is capital, especially the building, factory, and equipment used. In contrast, a variable input can be changed, making it THE means of expanding output in the short run.
- Consider, for example, Waldo's TexMex Taco World restaurant. The output for Waldo's production operation is Super Deluxe TexMex Gargantuan Tacos (with sour cream and jalapeno peppers). Some key inputs are the ingredients (sour cream, jalapeno peppers, lettuce, tomatoes, taco shells), the workers (lettuce shredders, tomato slicers, taco shell makers), and the capital (restaurant, deep-fat frier, knives).
- Another example is provided by the Shady Valley Amusement Park which produces the excitement of riding the Monster Loop Death Plunge Roller Coaster. A few inputs in this activity are the Monster Loop Death Plunge Roller Coaster itself, the ride operator, grease for the rails, electricity, and the janitorial staff who clean up after nauseated patrons.
Variable InputA variable input is an input whose quantity CAN be changed in the short run. The most common example of a variable input is labor. A variable input provides the extra inputs that a firm needs to expand short-run production. As larger quantities of a variable input, like labor, are added to a fixed input like capital, the variable input becomes less productive.
Consider, for example, the short-run production of Shady Valley's favorite lunch time meal, Super Deluxe TexMex Gargantuan Tacos (with sour cream and jalapeno peppers). The key variable input for Waldo Millbottom, the owner and proprietor of Waldo's TexMex Taco World, is the staff of workers.
To alter the production of TexMex Gargantuan Tacos, Waldo changes the size of his workforce. Waldo does not concern himself with the size of the restaurant, number of tables and chairs, amount of kitchen equipment, and available parking spaces.
Fixed InputA fixed input is an input whose quantity CANNOT be changed in the short run. The most common example of a fixed input is capital. A fixed input, like a factory, building, or piece of equipment, provides the "capacity" constraint for the short-run production of a firm.
The short-run production of Super Deluxe TexMex Gargantuan Tacos (with sour cream and jalapeno peppers) also illustrates fixed inputs. The key fixed input used by Waldo's TexMex Taco World is the restaurant and accompanying capital equipment.
In the day-to-day production of TexMex Gargantuan Tacos, Waldo does not concern himself with the size of the restaurant, number of tables and chairs, amount of kitchen equipment, and available parking spaces. The quantities of these items are fixed in the short run.
The Short and LongThe specification of inputs as either fixed or variable is intertwined with the distinction between short run and long run.
The difference between short run and long run depends on the particular production activity. For some producers, the short run lasts a few days. For others, the short run can last for decades. Moreover, whether an input is fixed or variable depends on whether the period of analysis is the short run or the long run. The four concepts are closely connected.
- Short Run: The short run is a period of time in which at least one input used for production and under the control of the producer is variable and at least one input is fixed.
- Long Run: The long run is a period of time in which at all inputs used for production and under the control of the producer are variable.
Under ControlThe preceding discussion of short run and long run includes the phrase "under control of the producer." The microeconomic analysis of production, both short run and long run, is primarily interested in how a firm selects a production level in response to the market price, which it does by changing the quantity of inputs used. However, the firm can only change those inputs under its control.
Many firms use inputs over which they have no control. Examples include government laws and regulations, social customs and institutions, weather, and the forces of nature. A farmer, for example, can control the amounts of labor, seeds, fertilizer, and capital equipment used for production, but not the amount of sunshine or rainfall. Waldo's TexMex Taco World can control the number of workers employed and the quantity of jalapeno peppers used, but not government health and safety regulations.
PRODUCTION INPUTS, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2024. [Accessed: February 24, 2024].
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