The Law of Diminishing Marginal Returns

The Law of DMP

Fixed factor and variable factors

Fixed factors

Variable factors

Definition Its employment

remains constant when
_______________
output increases.

Its employment
increases
________ as output
increases.

Examples factory buildings, land,

capital tools and
entrepreneurial skills

raw materials, labour,

fuel and electricity

The Law of DMP

Short run and long run

Short run

Long run

A period when there are both

___________
and
fixed factors
_____________.

A period when all factors

variable
are ________.

A firm can expand output

by employing more
variable factors only.
______________

A firm can expand output

by increasing the use of
all factors
__________.

variable factors

The Law of DMP

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

labour
total output produced by ______
given period of time holding
in a _________________,
capital
and technology constant.
__________________
TP ________
increases initially and
decreases
________ eventually with
increasing amount of workers.
The Law of DMP

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.

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.

Law of diminishing marginal returns

variable factors are added to a given
As more and more _____________
technology constant,
quantity of fixed factors, holding __________
marginal product eventually _____.
drops
Output

MP
Variable factor

The Law of DMP

Why do diminishing marginal returns occur ?

When more workers are added to a given amount of fixed
more fully utilised so MP
factors, the fixed factors are ________________;
rises initially.

Later, when more and more workers are added, there are
workers relative to the amount of
eventually too many _______
fixed factors.
The Law of DMP

Why do diminishing marginal returns occur ?

When more workers are added to a given amount of fixed
more fully utilised so MP
factors, the fixed factors are ________________;
rises initially.

decline leading to ______________.

diminishing MP
Efficiency will ______,
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

10

Quiz One
Electricity: variable
______________
factor
as more electricity is used
along with longer business
hours.
The salespersons:
______________
variable
factor as more
of them are needed to
persuade customers to
buy more.
The shop: _____________
fixed factor as the size of it remains
unchanged even if more clothes are sold.
The Law of DMP

11

Quiz Two
Find the total product and average
product schedule of our workers
from the following data:
Units of
labour 1
MP

40 46 50

44

36

26 14

The Law of DMP

12

Quiz Two
Units of
labour 1

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

13

Quiz Two
Units of
labour 1

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

MP

20

15

10

18

23

35 43

Which law in economics is violated by the above data?

Explain.
The law of diminishing marginal returns
______________________________________
violated as the MP eventually increases.
The Law of DMP

is
15

Quiz Three
The following table shows the marginal
product schedule of factory A:
Units of
labour

MP

20

15

10

18

23

TP

20 35 45 63 86 121 164

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

MP

20

15

10

18

23

TP

20 35 45 63 86 121 164

35 43

Can factory A alone satisfy the demand from the whole

world?
The marginal product increases after the _____
third unit of
labour.
The Law of DMP
17

Quiz Three
The following table shows the marginal
product schedule of factory A:
Units of
labour

MP

20

15

10

18

23

TP

20 35 45 63 86 121 164

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

MP

20

15

10

18

23

TP

20 35 45 63 86 121 164

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
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END

The Law of DMP

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