2. Production, Costs & Revenue - Diminishing Returns

Question 1

Which factors of production are considered fixed and variable in the short run?

Answer 1

Land and capital are considered fixed where as labour is variable

Question 2

What is marginal product?

Answer 2

This is the extra amount of output are adding an extra worker would create

Question 3

What is average product?

Answer 3

It is the total amount of goods or services produced divided by the number of workers it took to produce them

Question 4

What is the law of diminishing returns?

Answer 4

This is the idea that when you add variable factors to a set of fixed factors of production output will increase initially but overtime eventually decrease

Question 5

What causes diminishing returns?

Answer 5

Effectively diminishing returns are caused by the idea that too many chefs spoil the broth. In other words eventually adding more and more workers to the same land and capital resources means they’ll get in each other’s way and be less efficient.

Question 6

What does the law of diminishing returns mean for marginal and average product?

Answer 6

It means that eventually marginal product will peak and begin to fall at the point at which marginal product falls below average product the average product curve will also begin to fall as it’s dragged down by the MPC