4.1.4.3 Law of Diminishing returns to Scale

Law of Diminishing Returns

as extra units of a variable factor are added to a given quantity of a fixed factor, the output from each additional unit of the variables factor will rise at 1st but will then eventually diminish explains the shape of short-run cost curve

Total Returns Explained

the slope of the total returns increases moving up the curve, this shows the labour force benefiting from increasing marginal returns. Diminishing Marginal returns starts at point A, but output thus slope still rises just not by as much point Y shows total returns falling, beyond here additional workers get in the way and thus marginal returns to labour is negative

Marginal Returns

the additional quantity of output produced by adding one extra unit of input

Short Run production theory

the law of diminishing returns short run cost theory revenue theory

When do Diminishing Total Returns set in?

when the addition of an extra worker causes total output to fall ie. 6th worker, marginal returns is negative, output fell from 100 to 90 (workers are in the way thus output falls)

When is Marginal Returns likely to be high?

when the labor force is currently quite small workers can more easily benefit from the division of labor and specialisation

Total Returns

the quantity of output produced by a given quantity of inputs over a period of time

Average Returns

the quantity of output produced per unit of input

When do Diminishing Average Returns set it?

where total output/labour force begins to fall ie. avg. returns rises from 1-4 labour ie. 20, 21, 22.67 ,23.25 but from 5 workers avg. returns falls to 20, diminishing avg. returns have now set in, (falling avg. output per workers)

Long Run

A time period where all factors of production could be changed by the firm

Short Run

A time period where atleast one factor of production is fixed and cant be changed by the firm ie. Production Plant (capital) and land the length of time of the short-run will be decided by the length of time it takes to increase the quantity of the fixed factor. this will vary from industry to industry

Explain the Law of Diminishing Marginal returns

As you add workers they can specialize to increase output Eventually the Input of extra workers decreases the amount of Output per worker due to the limited fixed resources As each worker starts producing less and less additional Output The cost of those additional units of Output is rising

Marginal and Average Returns Relationships - Marginal is less than Average

Average returns falls

Marginal and Average Returns Relationships - Marginal = Average

Average returns is constant, neither rising or falling

Marginal and Average Returns Relationships - Marginal is greater than Average

Average returns rises

Marginal and Average Returns Relationships - what is not stated?

Average returns will rise if marginal is rising Average returns will fall if marginal is falling

What is Total Cost

Avg. Cost + Fixed Cost

Marginal Cost: Formula

Change in Total Cost/Change in Total Output

When do Diminishing Marginal Returns set in?

Diminishing marginal returns sets in when the Marginal returns falls when an additional worker is added ie. marginal returns for 2 workers is 22 (42-20), for 3 workers its 26 (68-42), for 4 workers it's 25 (93-68), this is where diminishing marginal returns has set in

How do Short-Run Cost Curves get influenced by the law of Diminishing Returns?

Marginal Cost falls then rises, diminishing marginal returns says as we add more workers additional output will rise at 1st (falling MC) but then diminish (why MC starts to rise) this is why the AVC also falls at 1st, as at first more workers means more output each but then why AVC rises is because eventually adding more workers decreases extra output ATC involves AVC so thus also rises

Long Run production theory

Returns to scale long-run cost theory

Average Cost: Formula

Total Cost / Total Output

Avg. productivity: Formula

Total Output / Number of Workers

Marginal and Average Returns Explanation

before B, increasing marginal returns occurs from employing more labour, shown by the rising marginal returns curve B shows diminishing marginal returns starting, from labour getting in the way, thus at B the diminishing marginal returns curve was at a maximum beyond this point, diminishing marginal returns are depicted by the falling marginal returns curve marginal returns becomes negative beyond W point of diminishing avg. returns is located at the highest point of the avg. returns curve, C