Product and Diminishing Returns PDF

## CONCEPT OF PRODUCT Output or product is the outcome of combining two or more raw materials or factors of production. The following are production of product terms: 1. **Total Product (TP)**: > The total quantity of commodities produced at a particular time as a result of the combination of all...

## CONCEPT OF PRODUCT Output or product is the outcome of combining two or more raw materials or factors of production. The following are production of product terms: 1. **Total Product (TP)**: > The total quantity of commodities produced at a particular time as a result of the combination of all the factors of production. TP rises if the amount of variable factors increases and vice versa. > Total Product is expressed mathematically as: > TP = AP x Labour (1) > Where AP = average product **Example**: If 30 men were employed in a farm and they produce an average of 15 tonnes of cassava per person, calculate the total product. **Solution** > TP = AP x Labour (2) > TP = 15 tonnes x 30 > = 450 tonnes 2. **Average Product (AP)**: > Average product (AP) is defined as the output per unit of the variable factors (Labour or raw materials) employed, that is, output per person. > This is obtained by dividing the total output by the number of labour or variable factors employed AP can be expressed mathematically as: > AP = Total product (output) > Number of labour (Variable factors employed) **Example**: If 3000 tonnes of cassava were harvested by 60 men in a farm on a daily basis, calculate the average output. **Solution** > AP = Total Output > No of labourers > = 3000 tonnes > 60 men > = 50 tonnes/person 3. **Marginal Product (MP)**: > The marginal product (MP) may be defined as the addition to total output or total product of the employment of one additional unit or one more unit of variable factors. Eg labour, raw materials etc. > MP is also a change in output as a result of a change in the amount of the variable factor (labour, raw materials). MP can be expressed mathematically as: MP = Change in Total Product > Change in Variable factor > Δ ΤΡ > ΔL **Example**: If 3,080 tonnes of cassava were harvested from the same farm as a result of additional man to the 60 men, calculate the marginal product. **Solution** > MP = Changes in TP > Change in labour > = 3080 - 3000 > 61 - 60 > = 80 tonnes ## Fixed Factors > It is a factor that does not vary or change (neither increase or decrease) with output. In the short run, the fixed factors always remain constant irrespective of the level of changes in output. Some good examples are land, fixed capital goods like machines, plant, vehicles, tools, etc. ## Variable Factors > It is a factor that varies (changes) with output. As variable factors increases output also increases and vice versa. Examples of variable factors are: labour, raw materials like flour and sugar in baking industry. ## TABLE OF INPUT AND OUTPUT (Total Product, Average Product and Marginal Product) | Fixed Factor (Land) | Variable Factor (Labour) | Total Product (kg) | Average Product (kg) | Marginal Product (kg) | |---|---|---|---|---| | 1 acre | 2 | 12 | 6 | 8 | | 1 acre | 3 | 24 | 8 | 12 | | 1 acre | 4 | 40 | 10 | 16 | | 1 acre | 5 | 45 | 9 | 5 | | 1 acre | 6 | 48 | 8 | 3 | | 1 acre | 7 | 42 | 6 | -6 | ## GRAPHICAL ILLUSTRATION OF INPUT AND OUTPUT **(Diagram - This portion describes a graph, but cannot be illustrated using markdown. Please refer to the image for visual representation)** ## RELATIONSHIP BETWEEN TOTAL PRODUCT, AVERAGE PRODUCT AND MARGINAL PRODUCT 1. TP, AP and MP rise initially before they start to fall. 2. TP rises and curves at maximum when MP = 3 2. MP is equal to zero when total product is at maximum. 4. MP starts to fall before AP. 5. TP declines after MP = 0 and MP assumes a negative value ## LAW OF VARIABLE PROPORTION (Law of Diminishing Returns or Diminishing Marginal Productivity) The law states that as more and more units of a variable factor (labour) is added to a fixed factor (land), output rises to a maximum and then starts to fall. ## Return to Scale It is the relationship between proportionate change in input to a proportionate change in output. A change in factor input brings about a proportionate change in output. ## Types of Return to Scale 1. **Constant Return to Scale**: > There are constant returns to scale if input doubles (increases by 10%), and output also doubles (increases by 10%). 2. **Increasing Returns**: > This is when output increases as the variable factor input increases. There is increasing return to scale if input doubles (increases by 10%) and output is more than doubled (increases by 20%). 3. **Decreasing Returns**: > This is when output decreases as the variable factor (labour) increases. There is decreasing return to scale if input doubles (increases by 10%), and output is less than doubled (increases by only 5%).