Law of diminishing returns Flashcards
What does the law of diminishing returns state
In the short run, when variable factors of production are added to a stock of fixed factors of production, marginal product will initially rise and then fall
What is the short run
- Where there is at least 1 fixed factor of production
- The length of this changes depending on the industry
- Normally there are 2 fixed factors in the short run (land and capital) and 1 variable factor (labour)
Why does marginal product initially rise when variable factors of production are added to a fixed stock
Adding more workers will lead to more labour productivity because:
- Specialisation as each worker can take different roles which they can master and production becomes more efficient
- Before, there was under-utilisation of the fixed stock of factors of production but as you add more workers, fixed stock becomes fully utilised
Why does marginal product start to fall when too many variable factors of production are added to a fixed stock
- As you add more workers, eventually there becomes are not enough of the fixed stock of factors of production for that many workers - - Causes workers to get in the way of each others output e.g. 3 workers want to use the same oven in a kitchen
- Causes a loss in labour productivity
What is average product
- It is the average output per worker
- The total product / quantity of labour
What is marginal product
- It is the additional output produced per worker added
- Change in total output / number of workers added
How do the diagrams of MP and AP look
- Graph of output against quantity of workers - AP and MP are curves which increase at first and then decrease
- MP is a steeper increase and decrease and it intersects AP at the max AP
- Therefore, AP only falls if the MP is less than it
How does the law of diminishing returns explain the shape of the AP and MP curves
They both increase at first and then decrease due to the law
What does the diagram for total output look like
- Increases and then decreases due to law of diminishing returns
- Max total output is where MP = 0
What do short run cost curves show
How costs change with additional output
What are the different short run cost curves
- Total fixed costs, total variable costs and total costs are normally shown on the same diagram
- AFC, AVC and AC are shown on the same diagram
- Main one is that AC and MC are shown on the same diagram
How do total fixed costs look like on a diagram
- TFC is a horizonal line as they are constant (e.g. rent and salaries)
How do total variable costs and total costs look like on a diagram
- TVC is a bit like a cubic which starts at origin and goes up because costs initially decrease and then increase due to law of diminishing returns
- TC is the same but y intercept at the fixed costs level as this is minimum costs
What is the average fixed cost and what does it look like on a diagram
- Fixed costs / output
- Falls, approaching 0, as output increases
What is average variable costs and what does it look like on a diagram
- TVC / output
- Smiley face shape due to law of diminishing returns
What is AC (average total costs) and how is it shown on a diagram
- AC = total costs / total q of output and AC = AVC + AFC
- Smiley face but shifted a bit above the AVC curve where the difference between them = AFC
- It is the inverse of the AP curve
What is MC and how is it shown on a diagram
- Increase in costs / increase in output that resulted of it
- Decreases at first and then increases due to LoDR
- Passes through minimum point of AC curve as if MC is greater than AC, AC decreases and vice versa
- It is the inverse of the MP curve
