4.3 The Law Of Diminishing Returns And Returns To Scale

Question 1

What is the short-run?

Answer 1

Time in period where at least one of the factors of production are fixed and cannot be varied

Question 2

What is the only way a firm can increase production in the short-run?

Answer 2

Adding more variable factors to the fixed factors of production

Question 3

What is the long-run?

Answer 3

The time in period where all the factors of production can be changed

Question 4

What are the marginal returns of labour?

Answer 4

Change in the quantity of total output resulting from the employment of one more worker, holding all the other factors of production fixed

Question 5

What type of law is the law of diminishing returns and what does it state?

Answer 5

-short-run law

-in the short run as a variable factor of production is added to a fixed factor of production total/marginal product will initially rise then fall

Question 6

What are marginal returns?

Answer 6

the rate of return for a marginal increase in investment

Question 7

What factor of production are usually variable in the short run?

Answer 7

Labour

Question 8

Equation for marginal product (or returns)

Answer 8

Change in total product/change in quantity of workers

Question 9

Equation for average product or returns?

Answer 9

Total product/quantity of workers

Question 10

Average returns of labour?

Answer 10

Total output/total number of workers employed

Question 11

Total returns?

Answer 11

Whole output produced by all the factors of production including labour employed by a firm

Question 12

When does the law of diminishing returns set in?

Answer 12

When labour is added to capital

Question 13

On a graph when does marginal product cut average product?

Answer 13

At the highest point of average product

Question 14

Why does the marginal returns initially increase when labour is added

Answer 14

Labour productivity

-specialisation of new workers
-underutilisation of capital e.g an oven not being used in a pizza shop

Question 15

Why does the marginal returns start to decrease

Answer 15

Labour productivity starts to decrease because

-fixed factors of production become a constraint on production(not enough fixed factors of production)

Question 16

When is total product(or returns) maximised

Answer 16

When marginal product is 0

(Because if it was positive employing another worker would increase output and if it was negative it would be inefficient)

Question 17

How are total returns and marginal returns different?

Answer 17

Total product shows it cumulatively
Marginal product shows it non cumulatively

Question 18

Describe the relationship between marginal and average on a graph?

Answer 18

-when marginal>average the average rises
When Marginal<average the average falls
When marginal=average the average is consistent

Question 19

What is the returns to scale?

Answer 19

Rate by which an output changes if all the factors of production are changed

Question 20

What is a plant?

Answer 20

An establishment such as a factory, a workshop or a retail outlet owned and operated on by a firm

Question 21

How can a firm delay the law of diminishing returns setting in?

Answer 21

Buy a bigger factory or invest in capital

Question 22

What is increasing returns to scale

Answer 22

When the scale of all factors of production employed increases output decreases at a faster rate

Question 23

What are constant returns of scale?

Answer 23

When the scale of all factors of production employed increases, output increases at the same rate

Question 24

Decreasing returns of scale?

Answer 24

When the scale of all the factors of production employed increases, output decreases at a slower rate

Question 25

Returns to scale in is the…

Answer 25

Long run

Question 26

total returns diagram

Answer 26

Question 27

marginal and average returns diagram

Answer 27

Question 28

Describe why this graph looks like this?

Answer 28

-rising from total returns until point A where diminishing marginal returns sets in and it decreases until point Y where total returns begin to fall

Question 29

Describe why this graph looks like this

Answer 29

Law of diminishing marginal returns sets in on point B on the marginal returns curve causing i to decrease

The point of the diminishing marginal returns of labour is at C which is why it decrease afterward