Law Of Diminishing Returns Flashcards
What does the law of diminishing returns state
States that in the short run, when variable factors of production (labour) are added to a stock of fixed FOP (LAND AND CAPITAL), total or marginal product will initially rise then fall
What is marginal product
Marginal product is the change in total output as one additional unit of input is added to production. E.g how much does output change by if one extra labour was added.
Equation for marginal product?
Change in total product / change in quantity of workers
Equation for average product
Total product / quantity of workers
What is occurring at section 1 of the diagram and section 2 of the diagram
At section 1:
Labour productivity is rising:
1) Due to specilisation and therefore productivity can be increased
2) Under utilisation of FoP i.e there may be extra machinery lying around which and extra worker can utilise
At section 2:
Labour productivity falls
1) Due to Fixed FoB constrain production i.e there isn’t enough fixed factors of production to cope with the workers e.g not enough machinery not enough machinery and therefore causing workers to get in the way of one another
Total production is maximised when MP equals….
Total product is maximised when marginal product is 0
Why is total product maximised when marginal product = 0?
When marginal product is negative total product is going to be falling and therefore not maximising TP. If marginal product is POSITIVE then each next worker hired is going to bring in more output. Therefore the only point where TP is maximised is when there is no more marginal product left i.e when it equals 0.
