1. Laws of Diminishing returns Numerical example

2. Factor Costs : Labour – wages/salaries Land – rent Capital – interest Enterprise - profit

3. Short and Long run: Short run – some factors fixed and cannot be increased/reduced Long Run – time taken to vary all factors of production Short and long run vary in all industries:

4. How can these ‘businesses’ increase productivity in the short run? Railways Supermarkets Local Builder

5. How can these ‘businesses’ increase productivity in the short run? Railways‘easy’ to increase labour Supermarketscan buy new shelving, hire staff Local Buildernew tools, hires assistant How can they increase production in the Long run? And how long is a long run?

6. How can they increase production in the Long run and how long is a long run? Railwayslong lead times for new rolling stock – 5 years SupermarketsOpen new stores - takes several years Local Builderpurchase a new van – takes a couple of months

7. Diminishing Marginal Returns Assumptions – some factors fixed (e.g. capital and land) Adding variable factor –labour Total Product Average Product = TP / Qv (variable factor) Marginal Product = ΔTP/ΔQv

8. Law of Diminishing Returns but when does ‘diminishing returns’ happen? More labour = more output… Capital InputLabour InputTotal OutputMarginal ProductAverage Product of Labour 2015 216 20330 20456 20585 206114 207140 208160 209171 2010180 2011187

9. Total output – so where does diminishing returns set in? Can you see it yet??? So you need to calculate marginal product

10. Calculate Marginal Product… Capital InputLabour InputTotal OutputMarginal ProductAverage Product of Labour 2015 21611 20330 20456 20585 206114 207140 208160 209171 2010180 2011187 To calculate MP At 2 workers…. 16-5 = 11 So you can calculate the rest!

11. Marginal product results… Capital InputLabour InputTotal OutputMarginal ProductAverage Product of Labour 2015 21611 2033014 2045626 2058528 20611429 20714026 20816020 917111 20101809 20111877 At low levels of labour input, the fixed factors of production - land and capital, tend to be under-utilised which means that each additional worker will have plenty of capital to use and, as a result, marginal product may rise. Beyond a certain point however, the fixed factors of production become scarcer and new workers will not have as much capital to work with so that the capital input becomes diluted among a larger workforce. As a result, the marginal productivity of each worker tends to fall – this is known as the principle of diminishing returns. So where are the increasing returns? Optimal returns? and diminishing returns?

12. Average Product Capital InputLabour InputTotal OutputMarginal ProductAverage Product of Labour 2015 5 216118 2033014 2045626 2058528 20611429 20714026 20816020 917111 20101809 20111877 So now calculate the average product… total output / labour

13. So how many workers are productively efficient? Capital InputLabour InputTotal OutputMarginal ProductAverage Product of Labour 2015 5 216118 203301410 204562614 205852817 2061142919 2071402620 816020 91711119 2010180918 2011187717 Should the co employ 6 7 8 workers? Using this logic – the co should only employ 6 workers. NO because the 7 th, 8 th etc worker still produces more on average – just that the returns are diminishing…. So how does a business decide how many workers to employ? Need to look at costs as well

14. Its easier to see on a graph…

15. Productive efficiency is at… 8 workers producing 160 units..

16. So now try an exercise yourself Don’t panic – this isn’t part of a DR or an essay…… However, it is the fundamental foundations of what you MUST KNOW for Marginal Costs, productive efficiency and economies of scale…i.e. unit 5!