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    Laws of Diminishing Returns

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    Anit Jacob Philip
    The document discusses the law of diminishing marginal returns. It explains that in the short run, as the variable inputs like labor are increased while fixed inputs remain constant, marginal product initially increases but eventually decreases. This is because the marginal efficiency of the variable inputs declines as there are too many workers relative to the fixed capital. The law states that as more variable inputs are added to a given amount of fixed inputs, marginal product will eventually fall.

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    © All Rights Reserved
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    Laws of Diminishing Returns

    Uploaded by

    Anit Jacob Philip
    30 views20 pages
    The document discusses the law of diminishing marginal returns. It explains that in the short run, as the variable inputs like labor are increased while fixed inputs remain constant, marginal product initially increases but eventually decreases. This is because the marginal efficiency of the variable inputs declines as there are too many workers relative to the fixed capital. The law states that as more variable inputs are added to a given amount of fixed inputs, marginal product will eventually fall.

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    laws of diminishing returns

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    The document discusses the law of diminishing marginal returns. It explains that in the short run, as the variable inputs like labor are increased while fixed inputs remain constant, marginal product initially increases but eventually decreases. This is because the marginal efficiency of the variable inputs declines as there are too many workers relative to the fixed capital. The law states that as more variable inputs are added to a given amount of fixed inputs, marginal product will eventually fall.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    30 views20 pages

    Laws of Diminishing Returns

    Uploaded by

    Anit Jacob Philip
    The document discusses the law of diminishing marginal returns. It explains that in the short run, as the variable inputs like labor are increased while fixed inputs remain constant, marginal product initially increases but eventually decreases. This is because the marginal efficiency of the variable inputs declines as there are too many workers relative to the fixed capital. The law states that as more variable inputs are added to a given amount of fixed inputs, marginal product will eventually fall.

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    The Law of Diminishing Marginal Returns

    The Law of DMP 1


    Fixed factor and variable factors
    Fixed factors Variable factors
    Definition Its employment Its employment
    remains constant when
    _______________ increases
    ________ as output
    output increases. increases.
    Examples factory buildings, land, raw materials, labour,
    capital tools and fuel and electricity
    entrepreneurial skills

    The Law of DMP 2


    Short run and long run

    Short run Long run


    A period when there are both A period when all factors
    ___________ and
    fixed factors variable
    are ________.
    _____________.
    variable factors

    A firm can expand output A firm can expand output


    by employing more by increasing the use of
    variable factors only.
    ______________ __________.
    all factors

    The Law of DMP 3


    Input-output relationship in the short run
    Assume there are two factors only: capital (fixed) and
    labour (variable). Technology is constant.
    Total product
    Labour
    (units)
    The total product of labour is the
    1 4
    labour
    total output produced by ______
    2 10 given period of time holding
    in a _________________,
    3 20 capital and technology constant.
    __________________
    4 28
    5 34
    6 38
    7 40
    TP ________
    increases initially and
    8 40 decreases
    ________ eventually with
    9 39 increasing amount of workers.
    10 37
    The Law of DMP 4
    Input-output relationship in the short run
    Average product (AP) is total product divided by the
    ________________.
    number of workers

    Total product Average product


    Labour
    (units) (units)
    1 4 4.00 AP ________
    increases
    2 10 5.00
    3 20 6.60
    initially but
    4 28 7.00 decreases
    ________
    5 34 6.80 eventually.
    6 38 6.34
    7 40 5.72
    8 40 5.00
    9 39 4.34
    10 37 3.70
    The Law of DMP 5
    Input-output relationship in the short run
    Marginal product (MP) is the change in total product as a
    result of _______________.
    a change in input

    Total product Marginal product MP of nth unit


    Labour
    (units) (units)
    TP of n units
    =_______________
    1 4 4
    2 10 6
    - TP of (n-1) units
    _______________
    3 20 10
    4 28 8 MP ________
    increases
    5 34 6 initially but
    6 38 4 decreases
    ________
    7 40 2
    8 40 0 eventually.
    9 39 -1
    10 37 -2
    The Law of DMP 6
    Law of diminishing marginal returns

    variable factors are added to a given


    As more and more _____________
    technology constant,
    quantity of fixed factors, holding __________
    marginal product eventually _____.
    drops
    Output

    MP
    Variable factor

    The Law of DMP 7


    Why do diminishing marginal returns occur ?
    When more workers are added to a given amount of fixed
    factors, the fixed factors are ________________;
    more fully utilised so MP
    rises initially.

    Later, when more and more workers are added, there are
    workers relative to the amount of
    eventually too many _______
    fixed factors.
    The Law of DMP 8
    Why do diminishing marginal returns occur ?
    When more workers are added to a given amount of fixed
    factors, the fixed factors are ________________;
    more fully utilised so MP
    rises initially.

    decline leading to ______________.


    Efficiency will ______, diminishing MP

    The Law of DMP 9


    Quiz One

    Can you classify these items in the


    boutique into fixed and variable
    factors: (1) the shop; (2) the
    salespersons and (3) electricity?

    The Law of DMP 10


    Quiz One
    Electricity: variable factor
    ______________
    as more electricity is used
    along with longer business
    hours.

    The salespersons:
    variable factor as more
    ______________
    of them are needed to
    persuade customers to
    buy more.

    The shop: _____________


    fixed factor as the size of it remains
    unchanged even if more clothes are sold.
    The Law of DMP 11
    Quiz Two

    Find the total product and average


    product schedule of our workers
    from the following data:
    Units of
    labour 1 2 3 4 5 6 7

    MP 40 46 50 44 36 26 14

    The Law of DMP 12


    Quiz Two

    Units of
    labour 1 2 3 4 5 6 7

    MP 40 46 50 44 36 26 14

    TP 40 86 136 180 216 242 256

    The total product of n units


    MP of the 1st unit + MP of the 2nd unit + …
    = _________________________________________
    + MP of the nth unit
    _________________________________________
    The Law of DMP 13
    Quiz Two

    Units of
    labour 1 2 3 4 5 6 7

    MP 40 46 50 44 36 26 14

    TP 40 86 136 180 216 242 256


    AP 40 43 45.4 45 43.2 40.3 36.6

    The average product of n units


    AP = TP / units of labour
    = _______________________

    The Law of DMP 14


    Quiz Three

    The following table shows the marginal


    product schedule of factory A:
    Units of
    labour 1 2 3 4 5 6 7

    MP 20 15 10 18 23 35 43

    Which law in economics is violated by the above data?


    Explain.
    The law of diminishing marginal returns
    ______________________________________ is violated
    as the MP eventually increases.
    The Law of DMP 15
    Quiz Three

    The following table shows the marginal


    product schedule of factory A:
    Units of
    labour 1 2 3 4 5 6 7

    MP 20 15 10 18 23 35 43
    TP 20 35 45 63 86 121 164

    Find the TP schedule for factory A.

    The Law of DMP 16


    Quiz Three

    The following table shows the marginal


    product schedule of factory A:
    Units of
    labour 1 2 3 4 5 6 7

    MP 20 15 10 18 23 35 43
    TP 20 35 45 63 86 121 164

    Can factory A alone satisfy the demand from the whole


    world?
    The marginal product increases after the _____
    third unit of
    labour. The Law of DMP 17
    Quiz Three

    The following table shows the marginal


    product schedule of factory A:
    Units of
    labour 1 2 3 4 5 6 7

    MP 20 15 10 18 23 35 43
    TP 20 35 45 63 86 121 164

    When the amount of labour increases after the third unit,


    TP will continue to increase
    ________ as the quantity of labour
    increases.
    The Law of DMP 18
    Quiz Three

    The following table shows the marginal


    product schedule of factory A:
    Units of
    labour 1 2 3 4 5 6 7

    MP 20 15 10 18 23 35 43
    TP 20 35 45 63 86 121 164

    Therefore, the factory can produce _______________


    infinitely larger
    amount of output by continuously increasing the quantity
    _________
    of labour, thus satisfying the demand from the whole
    world. The Law of DMP 19
    END

    The Law of DMP 20

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