Economics- 1.3.2b - Returns to a factor

Question 1

What is production?

Answer 1

the technological relationship of inputs and outputs

if firms increase output, must increase outputs of factor

inputs vary at different speeds and give different time periods in economics

Question 2

What is the definition of short and long run

Answer 2

Short run def; when firms can vary inputs of one FoP but not another one at the same time

Long run def: when firms can vary inputs of all FoP

Question 3

What is the definition of total, average and marginal product?

Answer 3

Total product= quantity per labour x labour

Average product = Total product / quantity of labour

Marginal product = change in total product / change in quantity of labour

Question 4

What is the definition of diminishing marginal returns?

Answer 4

At a certain point, employing an additional factor of production causes a relatively smaller increase in output.

Question 5

What are the arguments for the existence of the law of diminishing marginal returns?

Answer 5

Applies due to fixed FoP in the short run

problems of scarcity despite increases of FoP

lacks perfect substitutes

sub-optimal production

varies on what is produced

Question 6

What is the argument for the non-existence of the law of diminishing returns?

Answer 6

production is initially higher in fresh FoP

improved production methods (specialisation/division of labour)

spare capacity in capital - some machines dont run efficiently so using capacity causes more production