3.4.3 - The Law of Diminishing Returns and Returns to Scale

Question 1

What is the short-run in microeconomic theory?

Answer 1

The time period in which at least one of the factors of production is fixed and cannot be varied.

Question 2

How can firms produce more in the short-run?

Answer 2

Adding more variable factors to the fixed factors of production.

Question 3

What are variable factors?

Answer 3

The factors that change in accordance with output.

i.e. labour, energy etc.

Question 4

What are the marginal returns of labour?

Answer 4

The change in the quantity of total output resulting from the employment of one more worker, holding all the other factors of production fixed.

Question 5

What is the law of diminishing returns?

Answer 5

As a variable factor of production is added to a fixed factor of production, eventually both the marginal returns and then the average returns to the variable factor of production begin to fall.

i.e. as you add more variable factors of production, the returns get smaller and smaller.

Question 6

How do the first five workers change marginal returns?

Answer 6

Improve marginal returns, with 1, 7, 10, 14 and 18 for each of the 5 workers.

Question 7

Where are increasing marginal returns most likely?

Answer 7

Small workforces.

Question 8

How and why do marginal returns change in a small workforce?

Answer 8

Improve as the extra worker allows the workforce to be more organised more efficiently.

It improves as each worker can then specialise.

Question 9

Why does the law of diminishing marginal returns set in?

Answer 9

As a firm adds labour to fixed capital, more workers do not necessarily increase efficiency that much.

This may be because workers will get in each others way.

Question 10

At what point is the law of diminishing marginal returns clear?

Answer 10

At the point of the sixth worker.

Question 11

What are total returns?

Answer 11

The whole output produced by all the factors of production, including labour, that are employed by a firm.

Question 12

What are average returns of labour?

Answer 12

Total output / total number of workers employed.

Question 13

Where does marginal diminishing returns set in on a graph?

Answer 13

At the point where the gradient of the line begins to reduce.

Question 14

When should a firm stop employing more people?

Answer 14

When the marginal returns become negative from employing more people.

Question 15

How does a total returns curve plot its information?

Answer 15

Cumulatively.

Question 16

How does a marginal returns curve plot its information?

Answer 16

Non-cumulatively.

Question 17

Where does the law of diminishing marginal returns set in on the top graph?

Answer 17

A.

Question 18

Where does the law of diminishing marginal returns set in on the marginal returns graph?

Answer 18

B.

Question 19

Where does the law of diminishing marginal returns set in on the average returns graph?

Answer 19

C.

Question 20

What do the total, marginal and average return graphs all have in common?

Answer 20

They all display the same information, but that information is used differently in each curve.

Question 21

What do marginal and average curves always display when plotted from the same set of data?

Answer 21

When marginal is greater than average, the average rises.
When marginal is less than the average, the average falls.
When the marginal is constant, the average is constant.

Question 22

What does the law of marginal and average curves not demonstrate?

Answer 22

That as a marginal value rises, the average will not always rise.

The marginal has to be higher than the average comparatively.

Question 23

Where do marginal returns curve always cut through an average returns curve?

Answer 23

The point at which average returns of labour begins to fall, which is coincidentally the highest point on any average returns graph.

Question 24

What do marginal returns show?

Answer 24

The addition (or subtraction) to taking on the last worker added to the workforce.

Question 25

What do average returns show?

Answer 25

The total output / the number of workers.

Question 26

Does the point of diminishing average returns have to occur at the same point of diminishing marginal returns?

Answer 26

No.

Diminishing marginal returns occur first, then diminishing average returns occurs afterwards.

Question 27

What are returns to scale?

Answer 27

The rate by which output changes if the scale of all the factors of production is changed.

Question 28

What is a plant?

Answer 28

An establishment, such as a factory, a workshop or a retail outlet, owned and operated by a firm.

Question 29

Why may firms choose to increase the size of their plant rather than increasing the size of their labour force?

Answer 29

Over time, the detractor of short-run diminishing marginal returns begins to set in as more workers eventually get in one another’s way.

Increasing the size of the plant allows them to increase their returns to scale which has a higher limit to the short-run diminishing marginal returns.

Question 30

What are increasing returns to scale?

Answer 30

When the scale of all the factors of production employed increases, output increases by a faster rate.

Question 31

What are constant returns to scale?

Answer 31

When the scale of all the factors of production employed increases, the output increases at the same rate.

Question 32

What are decreasing returns to scale?

Answer 32

When the scale of all the factors of production employed increases, the output increases at a slower rate.

Question 33

What is important to remember regarding changing returns to scale and short-run returns?

Answer 33

Returns to scale only occur in long-run instances where all the factors of production can be altered.

Short-run returns increase when at least one factor of production is fixed.

Question 34

What is the key concept in short-run production theory?

Answer 34

The law of diminishing returns.