The law of diminishing returns and returns to scale Flashcards
What is the difference between the short run and the long run in production?
Short Run: A period during which at least one factor of production is fixed, and firms can only adjust variable inputs (e.g., labor) to change output.
Long Run: A period where all factors of production are variable, allowing firms to adjust all inputs and scale of operations.
Example: In the short run, a factory may hire more workers to increase output, but the size of the factory remains fixed. In the long run, the factory can expand its size and hire more workers.
What is the difference between marginal, average, and total returns?
1)Total Returns: The total output produced by all units of a factor of production.
2)Average Returns: Total returns divided by the number of units of the variable factor employed.
3)Marginal Returns: The additional output produced by employing one more unit of the variable factor.
Example: If a factory employs 5 workers producing 100 units of output, the total return is 100 units. The average return is 100 units ÷ 5 workers = 20 units per worker. If adding a 6th worker increases output to 120 units, the marginal return is 120 - 100 = 20 units.
What is the law of diminishing returns?
The law of diminishing returns states that, in the short run, adding more units of a variable factor (e.g., labor) to a fixed factor (e.g., capital) will eventually lead to smaller increases in output
Example: In a factory with a fixed number of machines, adding more workers initially increases output, but after a certain point, each additional worker contributes less to total output due to overcrowding and inefficiencies.
What are returns to scale?
Returns to scale refer to the changes in output resulting from a proportional change in all inputs in the long run.
Example: If a factory doubles all its inputs and output more than doubles, it experiences increasing returns to scale.
What is the difference between increasing, constant, and decreasing returns to scale?
1) Increasing Returns to Scale: A situation where a proportional increase in all inputs leads to a more than proportional increase in output
2) Constant Returns to Scale: A situation where a proportional increase in all inputs leads to an equal proportional increase in output
3) Decreasing Returns to Scale: A situation where a proportional increase in all inputs leads to a less than proportional increase in output
Example: If a company doubles its inputs and output more than doubles, it experiences increasing returns to scale. If output doubles exactly, it experiences constant returns to scale. If output less than doubles, it experiences decreasing returns to scale.
