1 / 18

Understanding Law of Diminishing Returns in Economics

Learn the Law of Diminishing Returns through a farm example with fixed factors like land and capital. Explore how adding variable factors like labor impacts output efficiency in different time periods.

ramonr
Download Presentation

Understanding Law of Diminishing Returns in Economics

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Economics A level – Unit 3 The Law of Diminishing (Marginal) Returns

  2. Time Periods • In the immediate period all factors of production are fixed in supply. • In the short-run at least one factor of production is fixed in supply, (this means no firm can enter or leave the market). • In the long run all factors are variable but technology is constant. • In the very long run technology changes. The law of Diminishing Marginal Returns is a short-run argument

  3. The Law of Diminishing (marginal) Returns We will use the example of a farm – where land, and capital which are fixed in supply and labour is the variable factor.

  4. Fixed factors of production • 1 Farm • 1 Tractor • 1 Combine harvester

  5. Labour Assumption - all units of the variable factor are homogenous

  6. Division of labour (specialisation) with only one worker there is no division of labour – time lost switching jobs. With a second worker they can specialise and are more efficient – the output more than doubles With a third worker they are now skilled in one area and are not losing much time switching tasks an eighth worker is now getting in the way . With a fourth worker more work is done than with three but the additional output is smaller than before. Employing more workers has no effect on output now

  7. Average Physical Product (APP)

  8. Marginal Physical Product (MPP) 3 Remember – mid point for marginal values This example is easy because workers increase by one, but watch other examples might be more complex

  9. For the graph you will need -

  10. Put paper this way up ‘portrait’ Output on the Y axis Number of workers on the X axis Leave room for a second graph.

  11. Have you plotted the mid points for the marginal physical product?

  12. The Law of Diminishing (Marginal) Returns states: (also known as the law of variable proportions) When one or more more factors of production are held fixed, there will come a point beyond which the extra output, from employing additional units of the variable factor, will diminish.

More Related