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What is essential to maximising resource allocation?
Understanding the laws of diminishing returns and returns to scale is essential to analysing production efficiency and maximising resource allocation in the subject of economics.
What do these ideas offer insights into?
These ideas clarify the short- & long-term relationships between inputs and outputs and offer insights into the dynamics of marginal, average, and total returns.
They also provide important info. about the scalability of industrial processes.
what is the short run?
The term "short run" in economic analysis refers to a period of time during which at least one input is fixed while other inputs are flexible.
What is the long run?
the long run denotes a period of time where all inputs are flexible.
Why is this distinction important?
It is important to make this distinction since it affects how flexible and constrained production decisions can be.
What does average returns measure?
The output per unit of input
What does marginal returns show?
the change in output coming from a small change in input (for example, one extra worker hired)
What does total returns show?
total returns show the total amount of output a set of inputs produced.
How can economists determine the best amounts of input?
Economists can determine the best amounts of input usage by analysing the relationships between these returns.
Draw a total product curve
Draw a marginal product curve
What is the law of diminishing returns?
According to law of diminishing returns, marginal returns will gradually decrease when more units of variable input are added to fixed input while keeping other inputs constant.
The marginal returns rise initially as the variable input is increased, but eventually they begin to fall.
Why does law of marginal returns happen?
This happens for a number of reasons, including a lack of available space, the overuse of certain resources, or production process inefficiencies.
The law of diminishing returns only applies in short run.
What happens when employing additional factor of production?
At a certain point, employing an additional factor of production causes a relatively smaller increase in output.
When does diminishing returns occur?
Diminishing returns occur in the short run when one factor is fixed (e.g. capital)
What happens if the variable factor of production is increased?
If variable factor of prod. is increased (e.g. labour), there comes point where it will become less productive and therefore there will eventually be decreasing marginal and then average product.
This is because, if capital is fixed, extra workers will eventually get in each other’s way as they attempt to increase prod. E.g. think about effectiveness of extra workers in a small café. If more workers are employed, production could increase but more and more slowly.
When does the law apply?
This law only applies in the short run because, in the long run, all factors are variable.
Draw diagram of diminishing returns
In this example, after 3 workers, diminishing returns sets in.
After employing 4 workers or more – the marginal product (MP) of the worker declines and the marginal cost (MC) starts to rise.
What is the difference between diminishing returns and dis-economies of scale?
Diminishing returns relate to short run – higher SRAC. Diseconomies of scale is concerned with long run. Diseconomies of scale occur when increased output leads to rise in LRAC – e.g. after Q4, we get rise in LRAC.
At output Q1, we get diminishing returns, shown by SRAC1.
If factory, increases capital, we can get diff. outcome, shown by SRAC2. But, we still get diminishing returns in short run.
How are chemical fertilisers an example of diminishing returns?
A good example of diminishing returns includes the use of chemical fertilisers- a small quantity leads to a big increase in output.
However, increasing its use further may lead to declining Marginal Product (MP) as the efficacy of the chemical declines.
How is revising an example of diminishing returns?
Revising into the early hours of the morning.
If you revise economics for 6 hours a day, you will improve your knowledge quite a bit.
However, if you continue to revise into the early hours of the morning, the amount that you learn increases by only a small amount because you are tired.
How is employing extra workers an example of diminishing returns?
A cafe may wish to serve more customers during the busy summer months.
However, employing extra workers may be difficult because of a lack of space in the cafe.
What is diminishing marginal returns to wealth?
As your wealth increases, initially, your happiness rises as you are able to buy food to eat and a place to live.
But, after certain level of wealth, gaining more wealth doesn’t lead to any rise in happiness.
As the old saying goes “money can’t buy happiness”.
What is returns to scale?
Returns to scale investigate how variations in input levels affect variations in output levels.
What is increasing returns to scale?
Increasing returns to scale occur when an equal percentage increase in each input results in an increase in output that is greater than proportional.
What is constant returns to scale?
Constant returns to scale occur when an equivalent percentage increase in inputs causes an increase in output that is proportional.
What is decreasing returns to scale?
Decreasing returns to scale occur when an increase in inputs results in an increase in output that is not proportionate. Returns to scale applies in the long run.
What do diminishing returns and returns to scale serve as?
Businesses & policymakers alike must comprehend the law of diminishing returns and returns to scale.
These ideas serve as a framework for production decisions, aid in the efficient use of resources, & shed light on scalability and effectiveness of prod. methods.
How can economists find the most efficient methods?
Economists can help find the most efficient methods for achieving greater productivity and sustainable growth by researching the dynamics of inputs and outputs.
What do marginal, average, and total returns show?
The relationship between inputs and outputs in the short run and the long run.
Find out whether relationship of Marginal Cost and Diminishing Marginal Returns should go on these flashcards
What does law of diminishing returns state?
That in the short run when variable factors of production are added to a stock of fixed factors of production total / marginal product will initially rise and then fall.
How to work out marginal product?
Change in total product / change in quantity of workers
How to work out average product?
Total product / quantity of workers
Draw diagram showing law of diminishing returns.
Where does marginal product cut average product?
At its highest point
What is happening in stage 1?
Labour productivity is increasing
Why is labour productivity increasing?
specialisation is taking place e.g. people in pizza shop are learning from each other i.e. when 3rd worker is employed, they learn from the second worker / OR … they each specialise in a different part of the production process
under utilisation of fixed factors of production e.g. there may be excess ovens in the pizza shop
What is happening in stage 2?
Labour productivity is decreasing
Why is labour productivity decreasing?
fixed factors of production become a constraint on production — aren’t enough fixed factors of production to take e.g. 3 workers. They get in the way of each other.
When will total product be at its highest?
When marginal cost is 0
Draw diagram showing law of diminishing returns (including TP)
Why is TP maximised when MP is 0?
if marginal product is negative, total product is going to be falling (so that can’t be maximising TP)
if marginal product is positive, then each next worker hired is going to bring in more output and therefore total product is going to keep rising
therefore, only point where TP is maximised is when there is no more MP left i.e. when MP is 0
