Capacity constraints

To supply goods and services to the market, you need more than ambition. No matter how large a business is or who owns it, all businesses confront one central fact: it costs something to produce goods. To produce corn, a farmer needs land, water, seed, equipment, and labor. To produce fillings, a dentist needs a chair, a drill, some space, and labor. Even the "production" of educational services (e.g., this economics class) requires the use of labor (your teacher), land (on which the school is built), and some capital (the building and blackboard). In short, unless you are producing unrefined, unpackaged air, you need factors of production – that is, resources that can be used to produce a good or service.

The factors of production used to produce a good or service provide the basic measure of economic cost. The costs of your economics class, for example, are measured by the amounts of land, labor, and capital it requires. These are resource costs of production.

An essential question for production is how many resources are actually needed to produce a given product. The answer depends on our technological know-how and how we organize the production process. At any moment, however, there is sure to be some minimum amount of resources needed to produce a good. Likewise, there will always be some maximum amount of output attainable from a given quantity of resources. These limits to the production of any good are reflected in the production function. The production function tells us the maximum amount of good X producible from various combinations of factor inputs. With one chair and one drill, a dentist can fill a maximum of 32 cavities per day. With two chairs, a drill, and an assistant, a dentist can fill up to 55 cavities per day.

A production function is a technological summary of our ability to produce a particular good. Table 1 provides a partial glimpse of one such function. In this case, the desired output is designer jeans, as produced by Tight Jeans Corporation. The essential inputs in the production of jeans are land, labor (garment workers), and capital (a factory and sewing machines). With these inputs, Tight Jeans can produce and sell fancy jeans to status-conscious consumers.

As in all production endeavors, we want to know how many pairs of jeans we can produce with available resources. To make things easy, we shall assume that the factory is already built, with fixed space dimensions. The only inputs we can vary are labor (the number of garment workers per day) and additional capital (the number of sewing machines we lease per day).

As you would expect, the quantity of jeans we can produce depends on the amount of labor and capital we employ. The purpose of a production function is to tell us just how much output we can produce with varying amounts of factor inputs. Table 5.1 provides such information for jeans production.

Table 1

A Production Function

(pairs of jeans per day)

A production function tells us the maximum amount of output attainable from alternative combinations of factor inputs. This particular function tells us how many pairs of jeans we can produce in a day with a given factory and varying quantities of capital and labor. With one sewing machine, and one operator, we can produce a maximum of 15 pairs of jeans per day, as indicated in the second column of the second row. To produce more jeans, we need more labor or more capital.

Consider the simplest option, that of employing no labor or capital (the upper left corner of Table 1). An empty factory cannot produce any jeans; maximum output is zero per day. The lesson here is quite simple: no inputs, no outputs. Even though land, capital (an empty factory), and even denim are available, some essential labor and capital inputs are missing, and jeans production is impossible.

Suppose now we employ some labor (a machine operator) but do not lease any sewing machines. Will output increase? Not according to the production function. The first row of Table 1 illustrates the consequences of employing labor without any capital equipment. Without sewing machines (or needles or other equipment), the operators cannot make jeans out of denim. Maximum output remains at zero, no matter how much labor is employed in this case.

The dilemma of machine operators without sewing machines illustrates a more general principle of production. The output of any factor of production depends on the amount of other resources available to it. Industrious, hardworking machine operators cannot make designer jeans without sewing machines.

We can increase the productivity of garment workers by providing them with machines. The production function again tells us by how much jeans output could increase if we leased some sewing machines. Suppose we leased just one machine per day. Now the second row of Table 1 is the relevant one. It says jeans output will remain at zero if we lease one machine but employ no labor. If we employ one machine and one worker, however, the jeans will start rolling out the front door. Maximum output under these circumstances (row 2, column 2) is 15 pairs of jeans per day. Now we're in business!

The remaining columns of row 2 tell us how many additional jeans we can produce if we hire more workers, still leasing only one sewing machine. With one machine and two workers, maximum output rises to 34 pairs per day. If a third worker is hired, output could increase to 44 pairs.

This information on our production capabilities is illustrated in Figure 5. The production function drawn here mirrors the second row of Table 1, where only one sewing machine is available. Point A illustrates the cold, hard fact that we can't produce any jeans without some labor. Points B through I show how production increases as additional labor is employed.

Efficiency Every point on the production function in Figure 5 represents the most output we could produce with a given number of workers. Point D, for example, tells us we could produce as many as 44 pairs of jeans with three workers. We must recognize, however, that we might also produce less. If the workers goof off or the sewing machines aren't maintained well, total output might be less than 44 pairs per day. In that case, we wouldn't be making the best possible use of scarce resources: we would be producing inefficiently. In Figure 5 this would imply a rate of output below point D. Only if we produce with maximum efficiency will we end up at point D or some other point on the production function.

Capacity Every point on the production function tells us how much output we could produce with a given amount of input – using our inputs efficiently. We could not keep increasing output forever, however, by hiring more workers. We have other production constraints. In this case, we have only a small factory and one sewing machine. If we keep hiring workers, we will quickly run out of space and available equipment. Land and capital constraints place a ceiling on potential output.

Notice in Figure 5 how total output peaks at point G. We can produce a total of 51 pairs of jeans at that point by employing six workers. What happens if we hire still more workers? According to Figure 5, if we employed a seventh worker, total output would not increase further. At point H, total output is 51 pairs, just as it was at point G, when we hired only six workers.

Figure 5

In the short run some inputs (e.g., land, capital) are fixed in quantity. Output then depends on how much of a variable input (e.g., labor) is used. The short-run production function shows how output changes when more labor is used. This figure is based on the second (one-machine) row of Table 5.1.

Short-Run Production Function

Were we to hire an eighth worker, total jeans output would actually decline, as illustrated by point I. An eighth worker would actually reduce total output by-increasing congestion on the factory floor, delaying access to the sewing machine, and just plain getting in the way. Given the size of the factory and the availability of only one sewing machine, no more than six workers can be productively employed. Hence, the capacity production of this factory is 51 pairs of jeans per day. We could hire more workers, but output would not go up.

1. Which of these statements expresses the main idea of the text?

1. A production function indicates how much output can be produced from available facilities, using different amounts of variable inputs.

2. Factors of production are resource inputs used to produce goods and services.

3. Land and capital constraints place a ceiling on potential output.

4. To supply goods and services to the market, you need factors of production.

2. Find in the text English equivalents of these words and phrases.

постачати товари	18. головна проблема	35. відповідний
честолюбство, прагнення	19. дійсно необхідний	36. здатність, здібність
володіти бізнесом	20. залежати від	37. скотити(ся)
протистояти	21. технологічне ноу-хау	38. неефективно
зерно	22. виробничий процес	39. містити в собі; значити
насіння, зерно	23. подібно, так само	40.ефективність, продуктивність
обладнання, устаткування	24. досяжний	41. не вистачати місця
пломбувати (зуби)	25. порожнина	42. максимальний випуск продукції
свердло, бур	26. проблиск	43. досягти вершини
освітянські послуги	27. модний, вишуканий	44. перемінні витрати
коротко кажучи	28. змагання, зусилля	45.зменшуватися, занепадати
неочищений	29. обмежені розміри помешкання	46.скорочувати, зменшувати
розпакований	30. додатковий капітал	47.перенаселеність, скупчення
фактори виробництва	31. вибір	48. доступ, прохід
виробляти продукт	32. наслідок, результат	49. обсяг, об’єм
надавати послугу	33. голка
витрати виробництва	34.працьовитий, старанний

3. Are these statements true or false? Correct the false ones.

1. To supply goods and services we need factors of production.

2. Sometimes it costs nothing to produce goods and services.

3. The basic measure of economic costs is the size of business.

4. The ownership is the essential question for production.

5. To produce a given product we need many resources.

6. The production process depends on the advance technologies.

7. To produce goods and services you need factors of production.

8. The basic measure of economic cost depends on the factors of production.

9. The increase of productivity depends on good equipment.

10. To produce with maximum efficiency we need good equipment.

11. Supply decisions are constrained by the capacity to produce and the costs of using that capacity.

12. In the short run, some inputs (e.g., land and capital) are fixed in quantity.

13. Increases in (short-run) output result from more use of variable inputs (e.g., labour).

14. Every point on the production function represents efficient production.

15. Capacity output refers to the maximum quantity that can be produced from a given facility.

4. Answer the questions.

1. What does the production function tell us about?

2. What is a production function?

3. What is the purpose of a production function?

4. What can help the increase of productivity?

5. What can help the additional productivity?

6. What can help the efficient productivity?

7. What constraints influence the output?

5. Write key words and phrases to each paragraph of the text.

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