4.1.4.3 The law of diminishing returns and returns to scale

What is the short-run?

The period of time when at least one factor input to the production process cannot be varied.

What is the long-run?

The period of time when all factor inputs can be varied, but the state of technology remains constant.

What is marginal return?

The extra output derived per extra unit of factor employed.

What is average return?

The output per unit of input.

What is total return?

The total output produced by a number of factors over a period of time.

What is the law of diminishing returns?

If increasing quantities of a variable input are combined with a fixed input, eventually the marginal product and then the average product of that variable input will decline.

Do diminishing returns occur in the long-run?

No, only in the short-run.

What are returns to scale?

The change in percentage output resulting from a percentage change in the quantity of inputs.

When are there increasing returns to scale?

When percentage increase in output is greater than the percentage increase in the factors employed.

When are there constant returns to scale?

When percentage increase in output = percentage increase in the factors employed.

When are there decreasing returns to scale?

When percentage increase in output is less than the percentage increase in the factors employed.