Shifting A Production Function
By definition, in the long run the firm can change its scale of operations by adjusting the level of inputs that are fixed in the short run, thereby shifting the production function upward as plotted against the variable input. If fixed inputs are lumpy, adjustments to the scale of operations may be more significant than what is required to merely balance production capacity with demand. For example, you may only need to increase production by a million units per year to keep up with demand, but the production equipment upgrades that are available may involve increasing productive capacity by 2 million units per year.
If a firm is operating at a profit-maximizing level in stage one, it might, in the long run, choose to reduce its scale of operations (by selling capital equipment). By reducing the amount of fixed capital inputs, the production function will shift down. The beginning of stage 2 shifts from B1 to B2. The (unchanged) profit-maximizing output level will now be in stage 2.
Read more about this topic: Production Function
Famous quotes containing the words shifting, production and/or function:
“One of the People! Born to be
Their curious epitome;
To share yet rise above
Their shifting hate and love.”
—Richard Henry Stoddard (1825–1903)
“By bourgeoisie is meant the class of modern capitalists, owners of the means of social production and employers of wage labor. By proletariat, the class of modern wage laborers who, having no means of production of their own, are reduced to selling their labor power in order to live.”
—Friedrich Engels (1820–1895)
“The function of literature, through all its mutations, has been to make us aware of the particularity of selves, and the high authority of the self in its quarrel with its society and its culture. Literature is in that sense subversive.”
—Lionel Trilling (1905–1975)