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Short-run & long-run increases in output. MPP. Increase. 20. 20. 15. 25. 10. 30. 5. 35. Diminishing returns to variable factor. Increasing returns to scale. Introductory Economic Lecture 14. Recap. The ‘scale’ of Production And ‘return’ to scale. The Location decision.
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Short-run & long-run increases in output MPP Increase 20 20 15 25 10 30 5 35 Diminishing returns to variable factor Increasing returns to scale
Introductory Economic Lecture 14
The ‘scale’ of Production And ‘return’ to scale
The Location decision
Industry size And ‘External’ Economics of scale
The Optimum Combination of Factors: The marginal Product Approach
It would be possible to reduce cost per unit of output by using a different combination of labor and capital MPPK MPPL if ≠ PL PK EXAMPLE MPPK MPPL if > PL PK More labor should be used relative to capital, since the firm is getting a greater physical return for its money from using extra workers than it is getting from using extra capital. However as more and more labor is used, diminishing returns to labor set in. Thus MPPL will fall. Likewise, as less capital is used, MPPK will rise. Until Technical or productive efficiency point MPPL MPPK = PL PK
Multi factor case MPPa MPPb MPPc MPPn = = = Pa Pb Pc Pn Where a . . . n are different factors of production