4.3 The Law Of Diminishing Returns And Returns To Scale Flashcards
What is the short-run?
Time in period where at least one of the factors of production are fixed and cannot be varied
What is the only way a firm can increase production in the short-run?
Adding more variable factors to the fixed factors of production
What is the long-run?
The time in period where all the factors of production can be changed
What are the marginal returns of labour?
Change in the quantity of total output resulting from the employment of one more worker, holding all the other factors of production fixed
What type of law is the law of diminishing returns and what does it state?
-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
What are marginal returns?
the rate of return for a marginal increase in investment
What factor of production are usually variable in the short run?
Labour
Equation for marginal product (or returns)
Change in total product/change in quantity of workers
Equation for average product or returns?
Total product/quantity of workers
Average returns of labour?
Total output/total number of workers employed
Total returns?
Whole output produced by all the factors of production including labour employed by a firm
When does the law of diminishing returns set in?
When labour is added to capital
On a graph when does marginal product cut average product?
At the highest point of average product
Why does the marginal returns initially increase when labour is added
Labour productivity
-specialisation of new workers
-underutilisation of capital e.g an oven not being used in a pizza shop
Why does the marginal returns start to decrease
Labour productivity starts to decrease because
-fixed factors of production become a constraint on production(not enough fixed factors of production)
When is total product(or returns) maximised
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)
How are total returns and marginal returns different?
Total product shows it cumulatively
Marginal product shows it non cumulatively
Describe the relationship between marginal and average on a graph?
-when marginal>average the average rises
When Marginal<average the average falls
When marginal=average the average is consistent
What is the returns to scale?
Rate by which an output changes if all the factors of production are changed
What is a plant?
An establishment such as a factory, a workshop or a retail outlet owned and operated on by a firm
How can a firm delay the law of diminishing returns setting in?
Buy a bigger factory or invest in capital
What is increasing returns to scale
When the scale of all factors of production employed increases output decreases at a faster rate
What are constant returns of scale?
When the scale of all factors of production employed increases, output increases at the same rate
Decreasing returns of scale?
When the scale of all the factors of production employed increases, output decreases at a slower rate
Returns to scale in is the…
Long run
total returns diagram
marginal and average returns diagram
Describe why this graph looks like this?
-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
Describe why this graph looks like this
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
