Final answer:
Capital is not the sole determinant of output; both labor and capital are vital inputs in a production function Q = f[L, K]. In the short run, capital is usually fixed, and output modifications are driven by labor, but in the long run, all factors are variable, allowing firms to optimize productivity.
Step-by-step explanation:
In the context of economics and business, capital is not the only determinant of output. There are various inputs or factors of production that contribute to the output level of a firm, which can include labor, capital, and natural resources, among others. In a production function, typically represented as Q = f[L, K], where Q represents the quantity of output, L stands for labor, and K stands for capital, it is understood that both labor and capital are important determinants of output.
However, in the short run, capital is often considered fixed, and output changes are primarily driven by variable factors such as labor. For example, a firm may have a fixed number of machines (capital), but they can vary the number of workers or the hours worked (labor) to adjust their output levels.
When we assume capital is fixed, as in the case of the typing firm with a limited number of PCs, any increase in output due to additional labor is subject to the law of diminishing returns.
This states that adding more of a variable input, such as labor, to a fixed amount of another input, like capital, will eventually yield proportionally smaller increments of output. Hence, the firm can only increase its output to a certain extent before productivity starts to decline.
In the long run, where all factors are variable, firms can adjust capital as well as labor to find the most efficient way of producing any desired level of output. This scenario presents the opportunity for a firm to optimize productivity by balancing the combination of capital and labor to preferential levels for their production processes.