The Law of Diminishing Marginal Returns

The Law of Diminishing Marginal Returns The Law of DMP

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

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. 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

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 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

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 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

Output 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

Why do diminishing marginal returns occur ? 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

Why do diminishing marginal returns occur ? 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 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 One 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 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 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

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

Quiz Three 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

Units of 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

Units of 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

Units of 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

Units of 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

END The Law of DMP

The Law of Diminishing Marginal Returns