Law of Diminishing returns Flashcards
Short run
A period of time where there is at least one fixed factor of production being observed/held constant(normally capital and land)
Law of Diminishing Returns
In the short run, when variable factors of production (Labour) are added to a stock of fixed factors of production, total/marginal product will initially rise and fall
Marginal product=
Change in total product/Change in quantity of Labour employed
Average product=
Total product/Quantity of labour
When will total product produced be maximised?
When marginal product is 0
Labour productivity increasing factors:
- Specialisation(of workers for different roles)
- Under-utilising of fixed factors of production(space for workers/resources for output)
Labour productivity decreasing(factors)
Fixed factors of production are a constraint on production(fixed capacity can only help a certain few workers)
Total cost=
Fixed cost of business + variable cost
Average cost=
Total cost/quantity of output produced or Average Fixed Cost + Average Variable Cost
Marginal cost=
Change in total cost/change in quantity
How can production be altered
By changing variable inputs e.g. Labour, raw materials and energy
Return on land
Rent
Return on labour
Wages
Return on capital
Profit
Return on enterprise
Profit/dividends/interest
Dividends
Profits on investment
When do you get back interest?
When you save money in a bank
Productivity of labour =
Output/Number of workers
Why would UK productivity lag behind US/Chinese productivity
The Chinese are being worked to the ground
The US work their workforce to the ground
The US use more technology
Average product
Measures output per worker employed or output per unit of capital
Marginal product
Change in output from increasing the number of workers used by one
Short run law of diminishing returns
As more units of a variable input are added to fixed amounts of land and capital, the change in total output will at first rise and then fall
Example of diminishing returns to marginal product of labour
tWhen diminishing returns set in, the marginal product of labour starts to fall. When the marginal product of labour declines below existing average product, then the average product of labour will fall
What happens as more of a variable factor is added to a fixed factor(diminishing returns)?
As more of a variable factor(e.g. labour) is added to a fixed factor(e.g. capital), a form will reach a point where it has a disproportionate quantity of labour to capital and so the marginal product of labour will fall, thus raising the marginal cost of getting a product to market. The average product will also fall, causing average variable cost to rise
