4.3

• what is average product?

  output per input unit
• average product formula


  total product / unit of input (e.g workers)
• What is the law of diminishing marginal returns?

  As more units of a variable factor (like labour) are added to a fixed factors (like machinery), both the marginal returns and eventually average returns to the variable factor will being to fall
• what is law of diminishing marginal returns also referred to as?

  law of diminishing marginal productivity
• marginal returns of labour definition

  the change in the quantity of total output resulting from the employment of one more worker, holding all the other factors of production fixed
• When does diminishing marginal returns occur?

  in the short run, when at least one factor is fixed
• what is marginal product?

  the extra output produced by adding one more unit of input (e.g one extra worker)
• what does the marginal product curve look like?

  • rises at first due to specialisation
  • then falls due to diminishing returns
• what are the implications of diminishing returns for costs?

  as marginal returns fall, marginal costs rise - it becomes more expensive to produce each additional unit
• total returns definition

  the whole output produced by all the factors of production, including labour, employed by a firm
• average returns of labour definition

  total output divided by the total number of workers employed
• what is the short run in production ?

  a period where at least one factor of production is fixed (usually capital)
• what is the long run in production ?

  a time period where all factors of production can be varied - nothing is fixed
• average returns definition

  total output divided by the total number of a given factor of production (e.g labour)
• returns to scale definition


  the rate by which output changes if the scale of all the factors of production is changed
• what are returns to scale?

  refers to how output changes when all inputs are increased in the same proportion in the long run
• what is a plant?

  an establishment, such as a factory, a workshop or retail outlet, owned and operated by a firm
• what are increasing returns to scale?

  • when inputs doubles and output more than doubles
  • increase in the scale of all the factors of production increases, output increases at a faster rate
  • more efficient
  • benefits from specialisation and bulk buying
• what are constant return to scale?

  Constant return to scale means that when all inputs are increased by a certain proportion, output increases by the same proportion (proportional)
• what are decreasing returns to scale?

  • when the scale of all factors of production employed increases, output increases at a slower rate
  • may reflect management issues or inefficiencies
• how are are returns to scale (RS)different from diminishing returns (DR) ?

  • time: DR = short run and RS = long run
  • inputs: DR = one variable input and RS = all inputs change
  • output: DR = marginal output and RS = overall scale of output
• what causes increasing returns to scale?

  • specialisation
  • bulk buying
  • better technology
  • spreading fixed costs over more output
• what cause decreasing returns to scale?

  • poor communication
  • coordination issues
  • diseconomies of scale
• increasing returns to scale are likely to lead to economies of scale
• return to scale is about what happens to output when you increase all inputs (factors of production) by the same proportion in the long run