Laws of Diminishing returns

1
Laws of Diminishing returns

• Numerical example

2
Factor Costs

• Labour wages/salaries
• Land rent
• Capital interest
• Enterprise - profit

3
Short and Long run

• Short run some factors fixed and cannot be
  increased/reduced
• Long Run time taken to vary all factors of
  production
• Short and long run vary in all industries

4
How can these businesses increase productivity
in the short run?
5
How can these businesses increase productivity
in the short run?
How can they increase production in the Long
run? And how long is a long run?
6
How can they increase production in the Long run
and how long is a long run?
7
Diminishing Marginal Returns

• Assumptions some factors fixed (e.g. capital
  and land)
• Adding variable factor labour
• Total Product
• Average Product TP / Qv (variable factor)
• Marginal Product ?TP/?Qv

8
Law of Diminishing Returns
More labour more output
but when does diminishing returns happen?
9
Total output so where does diminishing returns
set in?
Can you see it yet??? So you need to calculate
marginal product
10
Calculate Marginal Product
To calculate MP At 2 workers. 16-5 11 So
you can calculate the rest!
11
Marginal product results
So where are the increasing returns? Optimal
returns? and diminishing returns?
At low levels of labour input, the fixed factors
of production - land and capital, tend to be
under-utilised which means that each additional
worker will have plenty of capital to use and, as
a result, marginal product may rise. Beyond a
certain point however, the fixed factors of
production become scarcer and new workers will
not have as much capital to work with so that the
capital input becomes diluted among a larger
workforce. As a result, the marginal
productivity of each worker tends to fall this
is known as the principle of diminishing
returns.   
12
Average Product
So now calculate the average product total
output / labour
13
So how many workers are productively efficient?
Should the co employ 6 7 8 workers?
Using this logic the co should only employ 6
workers. NO because the 7th, 8th etc worker still
produces more on average just that the returns
are diminishing. So how does a business decide
how many workers to employ? Need to look at costs
as well
14
Its easier to see on a graph
15
Productive efficiency is at
8 workers producing 160 units..
16
So now try an exercise yourself

• Dont panic this isnt part of a DR or an
  essay
• However, it is the fundamental foundations of
  what you MUST KNOW for Marginal Costs, productive
  efficiency and economies of scalei.e. unit 5!