1. Production is the process that turns inputs into an output of goods and services.
2. The inputs are the four factors of production: land, labour, capital and enterprise.

1. In the short run, at least one factor is fixed while the others can be varied.
2. In the long run, every factor is variable, so the short run is defined by the fixed factor, not by a set length of calendar time.

Total, average, marginal product

Average product:

$$AP=\frac{TP}{L}$$

Marginal product:

$$MP=\frac{\Delta TP}{\Delta L}$$

Shape of the product curves

1. The first units of the variable factor may raise marginal product as workers specialise and use the fixed capital more fully.
2. Beyond a certain point marginal product falls because each extra worker shares a smaller amount of the fixed factor.
3. While marginal product is above average product, average product is rising.
4. While marginal product is below average product, average product is falling, so the marginal product curve cuts the average product curve at its maximum.

Law of diminishing returns

1. It is also called the law of variable proportions and applies only in the short run.
2. It occurs because each extra worker has a smaller share of the fixed capital, so the extra output they add eventually falls.
3. How quickly returns diminish depends on how much fixed capital there is relative to the variable factor, so a well-equipped plant delays the effect.

Link to short-run costs

1. Falling marginal product means each extra unit of output needs more of the variable factor.
2. So the marginal cost of output rises as the firm expands in the short run.
3. This link explains the upward-sloping short-run marginal and average cost curves studied next.