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    This document discusses the law of decreasing returns and the law of increasing costs. It explains that under the law of decreasing returns, as more variable inputs are added to fixed inputs, marginal product and average product will first increase but then eventually decrease. It provides an example using land and labor to show total production increasing at a decreasing rate. The assumptions and applications of the law of decreasing returns are also outlined. Additionally, the law of increasing costs is explained as marginal cost and average cost rising with additional units of the variable input due to the effects of the law of decreasing returns. A schedule and diagram are provided to illustrate these concepts.

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    Q.No. 13 b

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    This document discusses the law of decreasing returns and the law of increasing costs. It explains that under the law of decreasing returns, as more variable inputs are added to fixed inputs, marginal product and average product will first increase but then eventually decrease. It provides an example using land and labor to show total production increasing at a decreasing rate. The assumptions and applications of the law of decreasing returns are also outlined. Additionally, the law of increasing costs is explained as marginal cost and average cost rising with additional units of the variable input due to the effects of the law of decreasing returns. A schedule and diagram are provided to illustrate these concepts.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOC, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    20 views4 pages

    Eorupa Science & Commerece Academy: Economics Notes

    Uploaded by

    Faisi Prince
    This document discusses the law of decreasing returns and the law of increasing costs. It explains that under the law of decreasing returns, as more variable inputs are added to fixed inputs, marginal product and average product will first increase but then eventually decrease. It provides an example using land and labor to show total production increasing at a decreasing rate. The assumptions and applications of the law of decreasing returns are also outlined. Additionally, the law of increasing costs is explained as marginal cost and average cost rising with additional units of the variable input due to the effects of the law of decreasing returns. A schedule and diagram are provided to illustrate these concepts.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOC, PDF, TXT or read online from Scribd
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    of 4

    EORUPA SCIENCE & COMMERECE ACADEMY

    Economics Notes
    Q. No. 13 (b): Explain application. Answer: Law of decreasing return. Also discuss

    its

    LAW OF DECREASING RETURN


    INTRODUCTION: Law of return means the law under which return in the form of goods and services are obtained by using combination of four factors of production. The factors of production are of two types. a. Fixed factors of production. b. Variable factors of production In short run fixed factors remains same while variable factors can change the level of output. When the units of factors can change the level of output. When the units of variable factors of production are employed on the fixed factors of production the marginal product (MP) and Average product (AP) may increase, remains constant and may decrease. LAW OF DECREASING RETURN: A production process in which MP and AP start decreasing with the employment of variable factors of production is called law of decreasing return. In this process every next unit of variable factor gives less output as compared to previous one. DEFINITION: Law of decreasing return can be defined as: Other things remaining same when additional units of variable factors of production are applied on fixed factors of production, total production increases at decreasing rate, is called law of diminishing return. Explanation: In order to explain this law we take example of a land of 10 acres. Suppose per unit cost of variable factors of production is Rs. 100/-. SCHEDULE: Fixed Factors (Land) 10 Acres --------Variable Factor (Labour) 1 2 3 4 5 Total Production (TP) 50 90 120 140 150 Marginal Production (MP) 50 40 30 20 10
    AP= TP L

    50/1=50 90/2=45 120/3=40 140/4=35 150/5=30

    Explanation: The above schedule shows that when first unit of labour is applied on fixed factor of production MP is 50. When 2nd unit of labour is applied MP decreases from 50 to 40. Similarly 3rd, 4th, and 5th units of variable factors gives less output. Here total production is increasing at decreasing rate. Law of diminishing returns also known as law of increasing cost. Because, with the fall I MP and AP both MC and AC rises.
    Composed & Designed By:Basit butt 0313-4143948

    EORUPA SCIENCE & COMMERECE ACADEMY


    Economics Notes
    DIAGRAM:
    y-axis 50 45 40 35 30 MP25 & 20 AP15 10 5 0 1 5 2 3 4 x-axis Units of Variable Factor (Labour) MP AP

    In the diagram units of variable factors are measured along x-axis while MP and AP is taken on y-axis. There exist inverse relationship between units of labour and MP as well as with AP. Due to this inverse relation MP and AP curves are negatively sloped. ASSUMPTION: This law holds under the following assumptions. 1: No change in fixed factors of production: This law is based on the assumption that there is no change in fixed factor of production. 2: No change in method of production: If new and better methods of cultivation are discover MP will increase instead of decrease. Therefore it is assumed that there is no change in method of production. 3: Homogeneous Units: It is assumed that the units of variable factors of production are homogeneous. 4: Optimum Combination: This law holds if stage of optimum combination has been reached. 5: Factors are Perfectly Substitutes: It is further assumed that the factor of production is perfectly substitutes. APPLICATIONS OF THE LAW: These are as follows: 1: Internal and External Economics: There are certain advantages which can provide benefits from the scale of production. These advantages are called internal and external economics of scale. Division of labour is internal economy while specialization of labour is external economy. These economies are increasing function of production. 2: Supply of Factors:
    Composed & Designed By:Basit butt 0313-4143948

    EORUPA SCIENCE & COMMERECE ACADEMY


    Economics Notes

    In industrial sector, supply of factors is elastic. Essential factors are supplied to produce more output. 3: Modern Machinery and Techniques: In industrial sector modern techniques and machines are used to produce more out put. More output can be produced by adopting better technology. 4: Optimum Combination of Factors: Industrial sector is more under control of human beings as compared agriculture. Entrepreneur can put business under the law for a long time due to his experience, skills and administrative abilities.

    LAW OF INCREASING COST


    Q. No. 13: Explain Law of Increasing Assumptions and application. Answer: SCHEDULE: Fixed Factors of productio n 10 Acres --------DIAGRAM:
    y-axis 10 8 AC & 6 MC 4 AC 2 0 MC

    Cost.

    Also

    discuss

    its

    Variable Factors of Production 1 2 3 4 5

    TP 50 90 12 0 14 0 15 0

    MP 50 40 30 20 10

    AP 50/1=50 90/2=45 120/3=4 0 140/4=3 5 150/5=3 0

    MC=

    Per unit cost MP

    AC=

    Per unit Cost AP

    100/50=2 100/40=2.5 100/30=3.3 100/20=5 100/10=10

    100/50=2 100/45=2.2 100/40=2.5 100/35=2.9 100/30=3.3

    1 2 3 4 Units of Variable Factor 5 (Labour)

    x-axis

    Explanation: In the above diagram units of variable factor of production are measured along x-axis while MC and AC are taken on y-axis. Both MC and AC curves are
    Composed & Designed By:Basit butt 0313-4143948

    EORUPA SCIENCE & COMMERECE ACADEMY


    Economics Notes

    positively sloped because MC and AC are increasing with every increase in units of labour. Here MC is increasing faster than AC, then the reason that MC curve is above than the AC curve.

    Composed & Designed By:Basit butt

    0313-4143948

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