Explain and Illustrate with Diagrams the Differences Between Diminishing Marginal Returns and Decreasing Economies of Scale and Cite Causes and Examples

Topics: Economics, Economics of production, Microeconomics Pages: 2 (582 words) Published: September 12, 2012

Q(1) Explain and illustrate with diagrams the differences between diminishing marginal returns and decreasing economies of scale and cite causes and examples. Ans. The law of diminishing returns is also called the law of variable proportion, as the proportions of each factor of production employed keep changing as more of one factor is added. The law of diminishing returns does not imply that adding more of a factor will decrease the total production, a condition known as negative returns, though in fact this is common. A common sort of example is adding more workers to a job, such as assembling a car on a factory floor. At some point, adding more workers causes problems such as getting in each other's way, or workers frequently find themselves waiting for access to a part. In all of these processes, producing one more unit of output per unit of time will eventually cost increasingly more, due to inputs being used less and less effectively. The law of increased dimensions, also a technical economy of scale, states that to double the capacity of warehouses, transporters and other storage, you do not need to double the dimensions or workers, so the costs will not double. Economies of scale are the cost advantages that an enterprise obtains due to expansion. The main differences between the law of diminishing returns and returns to scale are that one is a concept in the short term, while the other can only occur in the long term. A firm can use both to increase output, and both can lead to unwanted negative effects, if taken too far. However, a firm can maximize its profits after the marginal product of the variable factor has started to fall, as long as employing the additional factor of production adds more to the firms' total revenue than it does to costs. If a firm is experiencing decreasing returns to scale, on the other hand, it is no longer maximizing profits.

Q(2) Suppose the jeans industry is in which each firm sells...
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