4.3 law of diminishing returns Flashcards
(13 cards)
what is the short run?
A time period where at least one factor of production is fixed
what is the law of diminishing marginal returns?
if one variable factor of production is increased while other factors stay fixed, eventually the marginal returns will begin to decrease
what is the difference between marginal returns and marginal product?
they are the same
what time period does this law operate in?
The law operates in the short run, a time period where at least one factor of production is fixed. Fixed resources do not change with the level of production (e.g., the number of pizza ovens), while variable resources do eg workers
analyse initial increasing returns on a diagram
When MP is greater than AP, AP increases and TP is increasing at an increasing rate
What are the two reasons for initial increasing returns?
1)specialisation
2)better utilisation of resources
analyse the point of diminishing marginal returns sets in
when MP is equal to AP, AP is at its maximum and TP increases at a decreasing rate
what is the reason for diminishing marginal returns?
fixed resources become a constraint on production
analyse diminishing marginal returns
When MP is less than AP, AP decreases and TP increases at a decreasing rate
What happens to TP when MP is zero
TP is maximised
What happens to TP when MP is negative
TP decreases
explain how marginal returns related to marginal costs?
As marginal returns rise, marginal costs fall because you’re getting more additional output from each unit of input while the cost per unit of output is lower.
what does fixed resources put a constraint on production mean?
there are physical limits to how much productivity can rise. You cannot infinitely replace capital with labour without a fall in output per worker, because the fixed factors become overutilized
