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The Law of Diminishing (Marginal) Returns

Economics A level – Unit 3. The Law of Diminishing (Marginal) Returns. Time Periods. In the immediate period all factors of production are fixed in supply. In the short-run at least one factor of production is fixed in supply, (this means no firm can enter or leave the market).

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The Law of Diminishing (Marginal) Returns

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  1. Economics A level – Unit 3 The Law of Diminishing (Marginal) Returns

  2. Time Periods • In the immediate period all factors of production are fixed in supply. • In the short-run at least one factor of production is fixed in supply, (this means no firm can enter or leave the market). • In the long run all factors are variable but technology is constant. • In the very long run technology changes. The law of Diminishing Marginal Returns is a short-run argument

  3. The Law of Diminishing (marginal) Returns We will use the example of a farm – where land, and capital which are fixed in supply and labour is the variable factor.

  4. Fixed factors of production • 1 Farm • 1 Tractor • 1 Combine harvester

  5. Labour Assumption - all units of the variable factor are homogenous

  6. Division of labour (specialisation) with only one worker there is no division of labour – time lost switching jobs. With a second worker they can specialise and are more efficient – the output more than doubles With a third worker they are now skilled in one area and are not losing much time switching tasks an eighth worker is now getting in the way . With a fourth worker more work is done than with three but the additional output is smaller than before. Employing more workers has no effect on output now

  7. Average Physical Product (APP)

  8. Marginal Physical Product (MPP) 3 Remember – mid point for marginal values This example is easy because workers increase by one, but watch other examples might be more complex

  9. For the graph you will need -

  10. Put paper this way up ‘portrait’ Output on the Y axis Number of workers on the X axis Leave room for a second graph.

  11. Have you plotted the mid points for the marginal physical product?

  12. The Law of Diminishing (Marginal) Returns states: (also known as the law of variable proportions) When one or more more factors of production are held fixed, there will come a point beyond which the extra output, from employing additional units of the variable factor, will diminish.

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