2019 May (Output/Costs/Revenues) Paper 1 TZ1

 2019 May (Output/Costs/Revenues) Paper 1 TZ1

1.     (a) Explain the relationship between the law of diminishing returns and a firms short-run cost curves.

Definitions

Law of Diminishing Returns – as an increasing number of variable inputs (think labor) are added to at least one fixed input (think factory) marginal product first increases and then eventually decreases, or, the marginal cost first decreases and then increases.

 

Costs of Production – costs related to the production of a good (fixed and variable)

Specialization - the understanding that as workers specialize in each task to produce a good or service they become more efficient at the task and therefore can produce more in working together.

There of course is a optimum number of workers for efficiency and a limit, if my taco truck can only hold 5 workers then trying to stuff 10 into the truck to increase production will obviously not work as they bump into each other getrting into each others way in the production process.

 

Short Run – at least one variable is fixed and unchangeable (think the factory) in the short-run we can’t buy/build a larger factory (its fixed) but we can play with other variables such as more or less labor, machines etc. In the Long run we can not only change all of the labor, machines etc but we can also buy/build a larger factory.

 

Long Run – all variables are flexible and can be changed.

 

Diagrams

Explanation

 

Diminishing returns is the understanding that as we add more inputs (workers) to the fixed capital in the production process we will initially get an marginal (per worker) increase in production due to specialization which would cause the costs per worker to decrease as each worker is producing more output per worker but at some point if we keep hiring worker their output will start to decrease (can only have so many people working in our taco truck) as they start bumping into each other and slowing down the process and therefore causing the marginal costs to continually increase as each worker hired produces less and less.

 

Notice that where MP is maximized the MC is minimized – if the workers numbers are at the optimum position then they are maximizing their output per worker, adding more workers just slows down the process causing less production per worker and therefore marginal costs increase.

 

 Jacob Clifford does it well - https://www.youtube.com/watch?v=_TQ62MwzSrY

as does Jason Welker - https://www.youtube.com/watch?v=09sOhhoB-20