4.1.4.3 The law of diminishing returns and returns to scale Flashcards
(24 cards)
What is the difference between the short run and the long run?
Short run: At least one factor of production is fixed (e.g., capital).
Long run: All factors of production are variable, and the scale of production can be changed.
What is marginal return?
Marginal return is the additional output produced by employing one more unit of a factor (e.g., labor), holding other factors constant.
What is average return?
Average return is the output per unit of input (e.g., output per worker over a period of time).
What is total return?
Total return is the total output produced by a given number of units of a factor (e.g., labor) over a period of time.
What is the law of diminishing returns?
The law of diminishing returns states that in the short run, as more units of a variable input (e.g., labor) are added to fixed inputs (e.g., capital), the marginal return of the variable input will eventually decrease.
When does the law of diminishing returns occur?
The law of diminishing returns occurs in the short run, when at least one factor of production is fixed.
What are the assumptions of the law of diminishing returns?
The law assumes:
Fixed factor resources in the short run.
Constant state of technology.
What is the relationship between diminishing returns and productivity?
Diminishing returns occur because adding more variable inputs (e.g., labor) to fixed inputs (e.g., machinery) makes each additional unit of input less productive.
What are returns to scale?
Returns to scale refer to how output changes when all factor inputs are increased proportionally in the long run.
What are increasing returns to scale?
Increasing returns to scale occur when output increases by a greater proportion than the increase in inputs (e.g., doubling inputs more than doubles output).
What are decreasing returns to scale?
Decreasing returns to scale occur when output increases by a smaller proportion than the increase in inputs (e.g., doubling inputs less than doubles output). This is linked to diseconomies of scale.
What are constant returns to scale?
Constant returns to scale occur when output increases by the same proportion as the increase in inputs (e.g., doubling inputs doubles output).
How are returns to scale related to economies of scale?
Increasing returns to scale: Linked to economies of scale (falling average costs).
Decreasing returns to scale: Linked to diseconomies of scale (rising average costs).
What is an example of increasing returns to scale?
If a firm doubles its inputs (e.g., labor and capital) and output quadruples, the firm experiences increasing returns to scale.
What is an example of decreasing returns to scale?
If a firm doubles its inputs and output increases by only 1.5 times, the firm experiences decreasing returns to scale.
What is an example of constant returns to scale?
If a firm doubles its inputs and output also doubles, the firm experiences constant returns to scale.
How does the law of diminishing returns affect marginal cost?
As diminishing returns set in, marginal cost rises because each additional unit of input produces less output, making production more expensive.
As MP falls, marginal cost (MC) rises because each additional unit of output requires more inputs (labour, raw materials, etc.) to produce.
How do returns to scale affect long-run average costs?
Increasing returns to scale: Long-run average costs fall.
Decreasing returns to scale: Long-run average costs rise.
Constant returns to scale: Long-run average costs remain unchanged.
Why is the law of diminishing returns only applicable in the short run?
In the short run, at least one factor of production is fixed, leading to diminishing returns as more variable inputs are added. In the long run, all factors are variable, so diminishing returns do not apply.
How does outsourcing relate to the law of diminishing returns?
Outsourcing allows firms to avoid diminishing returns by accessing flexible production methods and reducing costs, even in the short run.
How Outsourcing Relates to the Law of Diminishing Returns (AQA A-Level Economics)
Outsourcing—where firms delegate production processes to external suppliers—can help mitigate the effects of diminishing returns in the short run and improve long-run efficiency. Here’s how they connect:
- Avoiding Diminishing Returns in the Short Run
The law of diminishing returns states that adding more variable inputs (e.g., labour) to a fixed input (e.g., factory space) eventually leads to falling marginal productivity (MP) and rising marginal costs (MC).
Outsourcing allows firms to bypass this constraint by:
Shifting production externally (e.g., hiring a foreign manufacturer) instead of overloading their own facilities.
Avoiding inefficiencies (e.g., overcrowded factories, overworked staff) that would increase costs.
Example:
A UK car manufacturer facing rising MC due to limited factory space outsources part of production to Poland, where labour and space are cheaper.
- Access to Cheaper, More Efficient Labour (Lowering Costs)
Diminishing returns often occur because local labour becomes less productive (e.g., due to skill shortages or high wages).
Outsourcing to countries with lower labour costs (e.g., India for call centres, China for manufacturing) means:
Higher MP per worker (if foreign workers are more cost-effective).
Lower MC (since wages are lower abroad).
Example:
A software firm hires developers in India instead of the UK, reducing costs per unit of output and avoiding diminishing returns in its domestic office.
- Long-Run Avoidance of Fixed Input Constraints
In the long run, firms can overcome diminishing returns by investing in more capital (e.g., new factories).
However, outsourcing provides an alternative:
Instead of expanding their own capacity (costly & risky), firms lease external capacity (e.g., using a Vietnamese textile factory).
This keeps average costs (AC) down without facing diminishing returns from internal expansion.
Example:
Apple outsources iPhone production to Foxconn (China), avoiding the need to build massive factories itself.
Evaluation (AQA Higher-Level Analysis)
✅ Advantages of Outsourcing vs. Diminishing Returns:
Reduces MC & AC by accessing cheaper/more efficient labour.
Maintains productivity by avoiding over-reliance on limited domestic inputs.
❌ Limitations:
Quality control risks (e.g., poor working conditions in supplier factories).
Transport & communication costs may offset savings.
Ethical concerns (e.g., exploitation of low-wage workers).
What is the difference between marginal return and average return?
Marginal return: Additional output from one more unit of input.
Average return: Output per unit of input.
How does the law of diminishing returns impact total output?
Total output continues to rise as more variable inputs are added, but it increases at a slower rate due to diminishing returns.
What is the relationship between returns to scale and firm size?
Increasing returns to scale: Firms benefit from expanding.
Decreasing returns to scale: Firms may become less efficient as they grow.
Constant returns to scale: Firm size does not affect efficiency.
How do returns to scale influence a firm’s decision to expand?
Firms are more likely to expand if they experience increasing returns to scale, as this reduces average costs and increases profitability.
