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The law of diminishing marginal returns

The law of diminishing marginal returns. What you will learn . Fixed factors and variable factors. Short run and long run. The input-output relationship in the short run. The law of diminishing marginal returns. Take this challenge. Fixed factors and variable factors. Fixed factors.

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The law of diminishing marginal returns

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  1. The law of diminishing marginal returns

  2. What you will learn ... Fixed factors and variable factors Short run and long run The input-output relationship in the short run The law of diminishing marginal returns Take this challenge

  3. Fixed factors and variable factors Fixed factors Variable factors are factors whose employment ______________ when output changes. are factors whose employment ________ (decreases) as output increases (decreases). Definition increases remains constant Examples factory buildings, land, machinery raw materials, labour, fuel and electricity

  4. A period when there are both ___________ and _____________. Short run and long run Short run Long run A period when all factors of production are _______. fixed factors variable factors variable A firm can increase its output by employing more _____________ only. A firm can increase its output by increasing the use of _________. all factors variable factors

  5. Assume there are two factors only: capital (fixed) and labour (variable). Technology is constant. Total product (units) Labour 1 2 3 4 5 6 7 8 9 10 4 10 20 28 34 38 40 40 39 37 Input-output relationship in the short run The total product (TP) of labour is the total output produced by ______ in a ____________, holding ______ constant. labour period of time capital

  6. Total product (units) Labour 1 2 3 4 5 6 7 8 9 10 4 10 20 28 34 38 40 40 39 37 Input-output relationship in the short run The average product (AP) of labour measures the output per ___________, holding capital constant. unit of labour Average product (units) 4.00 5.00 6.67 7.00 6.80 6.33 5.71 5.00 4.33 3.70

  7. Total product (units) Labour 1 2 3 4 5 6 7 8 9 10 4 10 20 28 34 38 40 40 39 37 Input-output relationship in the short run The marginal product (MP) of labour measures the change in total product as a result of changing the employment of _______________, holding capital constant. labour by one unit Marginal product (units) MP of nth unit =_______________ _______________ TP of n units - TP of (n-1) units 4 6 10 8 6 4 2 0 -1 -2 4 6 10 8 6 4 2 0 -1 -2 MP ________ initially but ________ eventually. increases decreases

  8. Output MP Variable factor The law of diminishing marginal returns As more _____________ are added to a given quantity of fixed factors, marginal product eventually _____. variable factors drops

  9. Why do diminishing marginal returns occur ? When more workers are added to a given amount of fixed factors, the fixed factors are ________________; so MP rises initially. more fully utilised Later, when more and more workers are added, there are eventually too many _______ relative to the amount of fixed factors. workers

  10. Why do diminishing marginal returns occur ? When more workers are added to a given amount of fixed factors, the fixed factors are ________________; so MP rises initially. more fully utilised decline diminishing MP Efficiency will ______, leading to ______________.

  11. Can you classify these items in the boutique into fixed and variable factors: (1) the shop; (2) the salespersons and (3) electricity? Take this challenge 1

  12. Take this challenge 1 Electricity: ______________ as more electricity is used along with longer business hours. variable factor The salespersons: ______________ as more of them are needed to provide services to more customers. variable factor The shop: _____________ as the size of it remains unchanged even if more clothes are sold. fixed factor

  13. Find the total product and average product schedule of our workers from the following data: Units of tools 4 4 4 4 4 4 4 Units of labour 1 2 3 4 5 6 7 MP 40 46 50 44 36 26 14 Take this challenge 2

  14. Units of tools 4 4 4 4 4 4 4 Units of labour 1 2 3 4 5 6 7 MP 40 46 50 44 36 26 14 Take this challenge 2 TP 40 86 136 180 216 242 256 The total product of n units =_________________________________________ _________________________________________ MP of the 1st unit + MP of the 2nd unit + … + MP of the nth unit

  15. Units of tools 4 4 4 4 4 4 4 Units of labour 1 2 3 4 5 6 7 MP 40 46 50 44 36 26 14 Take this challenge 2 TP 40 86 136 180 216 242 256 AP 40 43 45.3 45 43.2 40.3 36.6 The average product of n units =_______________________ AP = TP / units of labour

  16. Units of tools 4 4 4 4 4 4 4 Units of labour 1 2 3 4 5 6 7 MP 40 46 50 44 36 26 14 Take this challenge 2 TP 40 86 136 180 216 242 256 AP 40 43 45.3 45 43.2 40.3 36.6 Does the law of diminishing marginal returns apply to the factory? Yes / No, as more workers are added to a fixed quantity of tools, marginal product eventually increases / drops.

  17. Units of machines 7 7 7 7 7 7 7 Units of labour 1 2 3 4 5 6 7 MP 20 15 10 18 23 35 43 Take this challenge 3 The following table shows the marginal product schedule of factory A: Which economic law does not hold as shown by the above data? Explain. _____________________________________ as the MP eventually is increasing. The law of diminishing marginal returns

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