Chapter 3.5 - Diminishing Marginal Returns

Question 1

What is total product?

Answer 1

Total product (TP) is the total output produced by workers.

Question 2

What is marginal product?

Answer 2

Marginal product (MP) is the output produced by an extra worker.

Question 3

Briefly explain the law of diminishing returns.

Answer 3

As more workers are added to a given stock of fixed factor of production, first the marginal cost of labour and the average product increase and then eventually decline.

Question 4

Define ‘diminishing marginal returns’.

Answer 4

Diminishing returns occur in the short run when one factor of production is fixed. If the variable factor of production is increased, there comes a point where it becomes less productive and therefore there will eventually be a decreasing marginal and then average product.

Question 5

When do economies of scale occur?

Answer 5

Economies of scale occur when the long run average costs (LRAC) fall as output increases.

Question 6

Define ‘external economies of scale’.

Answer 6

External economies of scale are the cost-saving advantages that accrue to the industry as a whole.