The Law of Diminishing Marginal Returns
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The Law of Diminishing Marginal Returns. Fixed factor and variable factors. Fixed factors. Variable factors. Its employment _______________ when output increases. Its employment ________ as output increases. Definition. remains constant. increases. Examples.

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Fixed factor and variable factors l.jpg
Fixed factor and variable factors

Fixed factors

Variable factors

Its employment _______________ when output increases.

Its employment ________ as output increases.

Definition

remains constant

increases

Examples

factory buildings, land, capital tools and entrepreneurial skills

raw materials, labour, fuel and electricity

The Law of DMP


Short run and long run l.jpg

A period when there are both ___________ and _____________.

Short run and long run

Short run

Long run

A period when all factors are ________.

fixed factors

variable

variable factors

A firm can expand output by employing more ______________ only.

A firm can expand output by increasing the use of __________.

all factors

variable factors

The Law of DMP


Assume there are two factors only capital fixed and labour variable technology is constant l.jpg
Assume there are two factors only: capital (fixed) and labour (variable). Technology is constant.

Total product (units)

Labour

1

2

3

4

5

6

7

8

9

10

4

10

20

28

34

38

40

40

39

37

Input-output relationship in the short run

The total product of labour is the total output produced by ______ in a _________________, holding __________________ constant.

labour

4

10

20

28

34

38

40

40

39

37

given period of time

capital and technology

TP ________ initially and ________ eventually with increasing amount of workers.

increases

decreases

The Law of DMP


Slide5 l.jpg

Total product (units) labour (variable). Technology is constant.

Labour

1

2

3

4

5

6

7

8

9

10

4

10

20

28

34

38

40

40

39

37

Input-output relationship in the short run

Average product (AP) is total product divided by the ________________.

number of workers

Average product

(units)

4.00

5.00

6.60

7.00

6.80

6.34

5.72

5.00

4.34

3.70

4.00

5.00

6.60

7.00

6.80

6.34

5.72

5.00

4.34

3.70

AP ________ initially but ________ eventually.

increases

decreases

The Law of DMP


Slide6 l.jpg

Total product (units) labour (variable). Technology is constant.

Labour

1

2

3

4

5

6

7

8

9

10

4

10

20

28

34

38

40

40

39

37

Input-output relationship in the short run

Marginal product (MP) is the change in total product as a result of _______________.

a change in input

Marginal product

(units)

MP of nth unit =_______________

_______________

TP of n units

- TP of (n-1) units

4

6

10

8

6

4

2

0

-1

-2

4

6

10

8

6

4

2

0

-1

-2

MP ________ initially but ________ eventually.

increases

decreases

The Law of DMP


Slide7 l.jpg

Output labour (variable). Technology is constant.

Variable factor

Law of diminishing marginal returns

As more and more _____________ are added to a given quantity of fixed factors, holding __________ constant, marginal product eventually _____.

variable factors

technology

drops

MP

The Law of DMP


Slide8 l.jpg

Why do diminishing marginal returns occur ? labour (variable). Technology is constant.

When more workers are added to a given amount of fixed factors, the fixed factors are ________________; so MP rises initially.

more fully utilised

Later, when more and more workers are added, there are eventually too many _______ relative to the amount of fixed factors.

workers

The Law of DMP


Slide9 l.jpg

Why do diminishing marginal returns occur ? labour (variable). Technology is constant.

When more workers are added to a given amount of fixed factors, the fixed factors are ________________; so MP rises initially.

more fully utilised

decline

diminishing MP

Efficiency will ______, leading to ______________.

The Law of DMP


Quiz one l.jpg
Quiz One labour (variable). Technology is constant.

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


Quiz one11 l.jpg
Quiz One labour (variable). Technology is constant.

Electricity: ______________ as more electricity is used along with longer business hours.

variable factor

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

variable factor

The shop: _____________ as the size of it remains unchanged even if more clothes are sold.

fixed factor

The Law of DMP


Quiz two l.jpg
Quiz Two labour (variable). Technology is constant.

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


Quiz two13 l.jpg
Quiz Two labour (variable). Technology is constant.

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


Quiz two14 l.jpg
Quiz Two labour (variable). Technology is constant.

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


Quiz three l.jpg
Quiz Three labour (variable). Technology is constant.

Units of

labour

1 2 3 4 5 6 7

MP 20 15 10 18 23 35 43

The following table shows the marginal product schedule of factory A:

Which law in economics is violated by the above data? Explain.

______________________________________ is violated as the MP eventually increases.

The law of diminishing marginal returns

The Law of DMP


Slide16 l.jpg

Units of labour (variable). Technology is constant.

labour

1 2 3 4 5 6 7

MP 20 15 10 18 23 35 43

Quiz Three

The following table shows the marginal product schedule of factory A:

TP

20

35

45

63

86

121

164

Find the TP schedule for factory A.

The Law of DMP


Slide17 l.jpg

Units of labour (variable). Technology is constant.

labour

1 2 3 4 5 6 7

MP 20 15 10 18 23 35 43

Quiz Three

The following table shows the marginal product schedule of factory A:

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 _____ unit of labour.

third

The Law of DMP


Slide18 l.jpg

Units of labour (variable). Technology is constant.

labour

1 2 3 4 5 6 7

MP 20 15 10 18 23 35 43

Quiz Three

The following table shows the marginal product schedule of factory A:

TP

20

35

45

63

86

121

164

When the amount of labour increases after the third unit, TP will continue to ________ as the quantity of labour increases.

increase

The Law of DMP


Slide19 l.jpg

Units of labour (variable). Technology is constant.

labour

1 2 3 4 5 6 7

MP 20 15 10 18 23 35 43

Quiz Three

The following table shows the marginal product schedule of factory A:

TP

20

35

45

63

86

121

164

Therefore, the factory can produce _______________

_________ output by continuously increasing the quantity of labour, thus satisfying the demand from the whole world.

infinitely larger

amount of

The Law of DMP


Slide20 l.jpg

END labour (variable). Technology is constant.

The Law of DMP


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