7. Laws of Returns - Returns to a Factor & Returns to a Scale Flashcards
What does Production in economics mean?
The act of making goods and services and thereby adding utility to an object is called Production in Economics.
What is Production Function?
The functional relationship between inputs & outputs is usually referred to as Production Function.
What is Short-Run?
Refers to the period of time during which the amount of some inputs, called “Fixed Factors” remain unchanged.
What is Long-Run?
Long Run is defined as the time period during which all the factors of production are varied and there are no fixed factors.
What are the two types of Production Function?
Short-Run and Long-Run Production Function.
Define Short Run Production Function.
Refers to a situation when only one input is variable and all the other inputs are constant.
Define Long Run Production Function.
Studies change in output when all inputs used in the production of a commodity are changed simultaneously and in the same proportion.
What is Total Product?
Refers to the total amount of a commodity produced during some specific period of time by combining a particular quantity of a variable factor with a given quantity of a fixed factor.
Define Average Product.
AP or APP of a variable factor refers to the output per unit of a variable factor.
Define Marginal Product.
MP or MPP is defined as the change in total product resulting from the use of one additional unit of a variable factor. Also known as “Marginal Returns.”
Define “Returns to a Factor.”
Means change in the physical quantity of a good when the quantity of one factor is increased while that of the other factors remain constant.
Define the Law of Variable Proportions.
States that as more and more units of a variable factor are applied to a given quantity of a fixed factor, TP may increase at an increasing rate initially, but eventually it will increase at a diminishing rate.
State some assumptions of the Law of Variable Proportions.
- The state of technology is given and remains unchanged.
- It is assumed that some inputs are kept fixed while others are varied. It is then only that the factor proportions can be changed.
- It is assumed that technology is such that it is possible to change the factor proportions.
- It is assumed that all the units of the variable factor are homogenous and are equally efficient.
Mention the 3 stages of Production.
I. Stage of Increasing Returns.
II. Stage of Diminishing Returns.
III. Stage of Negative Returns.
