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1.) Supply Analysis: Production, Inputs, and Cost When a firm experiences a sudden increase in the...

1.) Supply Analysis: Production, Inputs, and Cost

When a firm experiences a sudden increase in the demand for its product, in the shortrun it must operate longer hours and pay a higher overtime wage rate to satisfy this new demand. In the long-run, the firm can install more machines for longer hours. How might the firm sustainably respond to this increased output?

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Answer #1

Soln. A long run for a production process is a period of time in which all factors of production and costs are variable. Technology, resources, input materials, external entities all vary in long run. When the long-run average cost falls, this indicates that output is expanding. If the long-run average cost rises, the firm experiences a dis-economies of scale.Firms will search for the production technology that allows it to produce the desired level of output at the lowest cost. So, firm should install technology and machines that will support optimum production with least cost.  If the company will not be able to produce at its lowest cost possible, it may lose market share to competitors that are able to produce and sell at minimum cost.

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