Take this challenge Short run and long run The input-output relationship in the short run The law of diminishing marginal returns are factors whose employment ________ (decreases) as output increases (decreases). are factors whose employment ______________ when output changes. Fixed factors and variable factors Fixed factors factory buildings, land, machinery increases raw materials, labour, fuel and electricity remains constant Examples Variable factors Definition A firm can increase its output by employing more _____________ only. Short run and long run A period when there are both ___________ and _____________. fixed factors variable factors variable factors Short run Long run A period when all factors of production are _______. variable A firm can increase its output by increasing the use of _________. all factors Assume there are two factors only: capital (fixed) and labour (variable). Technology is constant. Input-output relationship in the short run 4 10 20 28 34 38 40 40 39 37 1 2 3 4 5 6 7 8 9 10 Total product (units) Labour The total product (TP) of labour is the total output produced by ______ in a ____________, holding ______ constant. period of time labour capital Input-output relationship in the short run 4 10 20 28 34 38 40 40 39 37 1 2 3 4 5 6 7 8 9 10 Total product (units) Labour The average product (AP) of labour measures the output per ___________, holding capital constant. unit of labour Average product (units) 4.00 5.00 6.67 7.00 6.80 6.33 5.71 5.00 4.33 3.70 Input-output relationship in the short run 4 10 20 28 34 38 40 40 39 37 1 2 3 4 5 6 7 8 9 10 Total product (units) Labour The marginal product (MP) of labour measures the change in total product as a result of changing the employment of _______________, holding capital constant. Marginal product (units) MP of nth unit =_______________ _______________ TP of n units - TP of (n - 1) units MP ________ initially but ________ eventually. increases decreases labour by one unit 4 6 10 8 6 4 2 0 -1 -2
4 6 10 8 6 4 2 0 -1 -2
The law of diminishing marginal returns As more _____________ are added to a given quantity of fixed factors, marginal product eventually _____. variable factors drops Output Variable factor MP 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 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 Efficiency will ______, leading to ______________. decline diminishing MP Take this challenge 1 Can you classify these items in the boutique into fixed and variable factors: (1) the shop; (2) the salespersons and (3) electricity? The shop: _____________ as the size of it remains unchanged even if more clothes are sold. fixed factor The salespersons: ______________ as more of them are needed to provide services to more customers. variable factor Electricity: ______________ as more electricity is used along with longer business hours. variable factor Take this challenge 1 Take this challenge 2 Find the total product and average product schedule of our workers from the following data: MP 40 46 50 44 36 26 14 Units of labour 1 2 3 4 5 6 7 Units of tools 4 4 4 4 4 4 4 The total product of n units = _________________________________________ _________________________________________ MP of the 1 st unit + MP of the 2 nd unit + + MP of the nth unit TP 40 86 136 180 216 242 256 Take this challenge 2 MP 40 46 50 44 36 26 14 Units of labour 1 2 3 4 5 6 7 Units of tools 4 4 4 4 4 4 4 The average product of n units = _______________________ AP = TP / units of labour AP 40 43 45.3 45 43.2 40.3 36.6 Take this challenge 2 TP 40 86 136 180 216 242 256 MP 40 46 50 44 36 26 14 Units of labour 1 2 3 4 5 6 7 Units of tools 4 4 4 4 4 4 4 Does the law of diminishing marginal returns apply to the factory? Take this challenge 2 Yes / No, as more workers are added to a fixed quantity of tools, marginal product eventually increases / drops. AP 40 43 45.3 45 43.2 40.3 36.6 TP 40 86 136 180 216 242 256 MP 40 46 50 44 36 26 14 Units of labour 1 2 3 4 5 6 7 Units of tools 4 4 4 4 4 4 4 Take this challenge 3 The following table shows the marginal product schedule of factory A: Which economic law does not hold as shown by the above data? Explain. _____________________________________ as the MP eventually is increasing. The law of diminishing marginal returns MP 20 15 10 18 23 35 43 Units of labour 1 2 3 4 5 6 7 Units of machines 7 7 7 7 7 7 7