Microeconomics PPT Semi-Finals 4 for second

1. The Law of
Diminishing
Returns

2. Law of Diminishing Returns
• Expresses a very basic relationship. As successive
units of a variable resource are added to a fixed set
of resources, beyond some point the extra or
marginal product attributable to each additional unit
of the variable resource will decline.

3. Law of Diminishing Returns
• Holds that we will get less and less extra output
when we add additional doses of an input while
holding other inputs fixed. In other words, the
marginal product of each unit of input will decline as
the amount of that input increases, holding all other
inputs constant.

5. Increasing Marginal Returns
• Happen when the marginal product of an additional
worker exceeds the marginal product of the
previous worker. We can also say that there is
increasing marginal returns when a small numbers
of workers are employed and arise from increased
specialization and division of labor in the production
process.

6. Decreasing Marginal Returns
• All production process eventually reach a point of
decreasing marginal returns. Decreasing marginal
returns occur when the marginal product of an
additional worker is less than the marginal product
of the previous worker hired to do the same task.
• Decreasing marginal returns arise from the fact that
more and more workers use the same equipment
and work space.

7. Returns to Scale
• Sometimes we are interested in the effect of
increasing all inputs. For example, what would
happen to rice production if farm land, labor,
irrigation, fertilizers, pesticides and other inputs
were increased by the same proportion? This
questions refers to the returns to scale or the
effects of scale increases of inputs on the quantity
produced.

8. Three types of Return to Scale
• Constant Return to scale
• Increasing Return to scale
• Decreasing Return to scale

9. Constant Returns to Scale
• Indicates a case where a change in all inputs leads
to a proportional change in output. For instance, if
farm land, number of farmers and other farm input
are doubled, then we can assume that under this
condition rice production would also double.

10. Increasing Returns to Scale
• Happen when an increase in all inputs leads to a
more than proportional increase in the level of
output. For example, a farmer will generally find
that increasing the inputs of labor, irrigation,
fertilizers and pesticides by 10 percent will increase
a total rice production by more 10 percent.

11. Decreasing Return to Scale
• Occur when a balanced increase in all inputs leads
to a less than proportional increase in total output.
In many process, scaling up may eventually reach a
point beyond which inefficiencies set in. This may
arise because the cost of management or control
becomes large.