Questions and Answers
What are marginal returns?
The additional quantity of output produced by adding one extra unit of the variable resource employed, e.g., labor.
What are average returns?
Average output per unit of input over time, e.g., output/number of workers.
What are total returns?
Total output produced by a number of units of factors over a period of time.
What does the law of diminishing marginal returns state?
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What happens to total returns as marginal returns decrease?
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What shape do short run cost curves take due to diminishing marginal returns?
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Study Notes
Key Concepts in Marginal Returns
- Marginal Returns refers to the additional output resulting from one more unit of a variable resource, such as labor.
- Average Returns measures the output produced per input unit over a time frame, calculated by dividing total output by the number of workers.
- Total Returns indicates the complete output generated by various units of factors during a specified period.
The Law of Diminishing Marginal Returns
- This law states that as more units of a variable factor are added to a fixed factor, the added output from each additional unit will eventually decline.
- The total output will continue to increase but at a diminishing rate, leading to a reduction in productivity for each new unit employed.
Analysis of Returns in Graphical Form
- A diagram illustrating diminishing marginal returns shows that as marginal returns decrease, the slope of total returns starts to flatten.
- When marginal returns turn negative, the total returns slope also becomes negative.
- If marginal returns exceed average returns, the average returns will increase, indicating improving productivity.
Cost Curve Dynamics
- Short-run cost curves—marginal cost (MC), average total cost (ATC), average variable cost (AVC), and average fixed cost (AFC)—exhibit a U-shaped pattern due to the effects of diminishing marginal returns.
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Test your knowledge on the law of diminishing marginal returns with these flashcards. Each card explores key concepts such as marginal returns, average returns, and total returns, providing definitions to enhance your understanding of this economic principle.
