4.3 The law of diminishing returns and returns to scale

unfinished

returns refers to what

changes in outputs with respect to changes in inputs

short run

At least one factor of production is fixed

long run

all factors of production are variable

the law of diminishing returns is only valid…

in the short run

the law of dimishing returns states that

as a variable factor of production is added to a fixed factor of production then the marginal output to the variable factor of production will fall

mariginal returns

change in quantity output from employing one additional unit of input while keeping other inputs constant

marginal returns of labour

the change in quantity output from employing one extra worker given that all other FoP are fixed

average returns

total output/total input

total returns

the overal output procuced by a given combination of inputs

difference between returns to scale and the law of diminishing returns

returns to scale opperates in the long run wheras diminishing returns is a short term metric

returns to scale

the change in output when all inputs are increased

what graph can be used to show RtS

LRAC curve

gradient is -ive shows increasing RtS

gradient = 0 shows constant RtS

gradient is +ive shows decreasing RtS

Increasing returns to scale

when a proportional increase in all FoP results in a more than proportional increase in output

constant reurtns to scale

when a proportional increase in all FoP results in an equivilent increase in output

decreasing returns to scale

when a proportional increase in all FoP results in a less than proportional increase in output