Law Of Diminishing Returns Flashcards
What is the short run
One factor of input is fixed (usually capital but can also be land)
What is the long run
All factors of production are variable and the scale of production can also change
What is marginal product
The change in output from increasing the number of workers used by one person, or adding one more machine
What does the law of diminishing returns state
That as more units of variable input are added to fixed amounts of land and capital, the change in total output will first rise and then fall
How may businesses maximise productivity and reduce unit costs
Capital-labour substitution where capital machinery and technology replaces some of the labour input
What are unit labour costs
Labour costs per unit of output
What is AVC
Variable cost per unit of output
What is the shape of AVC determined by
The shape of MC
What is rising MC due to
Diminishing returns
What happens to AFC over time
They must fall continuously as output increases because total fixed costs are being spread over a higher level of production
Factors causing shifts in supply costs
- changes in unit costs of production
- fall in the XR
- advances in technology
- entry of producers into the market
- favourable weather conditions
- taxes, subsidies and government regulations
