The Law of Diminishing Marginal Returns The Law

The Law of Diminishing Marginal Returns The Law of DMP 1

Fixed factor and variable factors Fixed factors Variable factors Its employment Definition Its employment remains constant increases ________ when ____ as output increases. Examples factory buildings, land, capital tools and entrepreneurial skills The Law of DMP raw materials, labour, fuel and electricity 2

Short run and long run Short run Long run A period when there are both ______ and fixed factors variable factors _______. A period when all factors are ____. variable A firm can expand output by employing more variable factors _______ only. A firm can expand output by increasing the use of _____. 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. Labour 1 2 3 4 5 6 7 8 9 10 Total product (units) 4 10 20 28 34 38 40 40 39 37 The total product of labour is the total output produced by ______ labour given period of time in a _________, holding capital and technology constant. _________ TP ____ initially and increases ____ eventually with decreases increasing amount of workers. The Law of DMP 4

Input-output relationship in the short run Average product (AP) is total product divided by the ________. number of workers Labour 1 2 3 4 5 6 7 8 9 10 Total product (units) 4 10 20 28 34 38 40 40 39 37 Average product (units) 4. 00 5. 00 6. 60 7. 00 6. 80 6. 34 5. 72 5. 00 4. 34 3. 70 The Law of DMP AP ____ increases initially but decreases ____ eventually. 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 Labour 1 2 3 4 5 6 7 8 9 10 Total product (units) 4 10 20 28 34 38 40 40 39 37 Marginal product (units) 4 6 10 8 6 4 2 0 -1 -2 The Law of DMP MP of nth unit =________ TP of n units - TP of (n-1) units ________ MP ____ increases initially but decreases ____ eventually. 6

Law of diminishing marginal returns variable factors As more and more _______ are added to a given technology quantity of fixed factors, holding _____ constant, 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 ________; so MP more fully utilised rises initially. Later, when more and more workers are added, there are workers eventually too many _______ relative to the amount of 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 ________; so MP more fully utilised rises initially. decline diminishing MP Efficiency will ______, leading to _______. 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: _______ as more variable factor of them are needed to persuade customers to buy more. The shop: _______ as the size of it remains fixed factor unchanged even if more clothes DMP sold. The Law of are 11

Quiz Two Find the total product and average product schedule of our workers from the following data: Units of labour 1 MP 2 3 4 5 6 40 46 50 44 36 26 14 The Law of DMP 7 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 1 st unit + MP of the 2 nd 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 MP 20 15 10 18 23 6 7 35 43 Which law in economics is violated by the above data? Explain. ___________________ The law of diminishing marginal returns as the MP eventually increases. The Law of DMP is violated 15

Quiz Three The following table shows the marginal product schedule of factory A: Units of labour 1 2 3 4 5 MP 20 15 10 18 23 TP 20 35 45 63 86 121 164 6 7 35 43 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 MP 20 15 10 18 23 TP 20 35 45 63 86 121 164 6 7 35 43 Can factory A alone satisfy the demand from the whole world? The marginal product increases after the _____ unit of third 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 MP 20 15 10 18 23 TP 20 35 45 63 86 121 164 6 7 35 43 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 MP 20 15 10 18 23 TP 20 35 45 63 86 121 164 6 7 35 43 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