What you will learn ...

Fixed factors and variable factors

Take this challenge
Short run and long run
The input-output relationship in the
short run
The law of diminishing marginal returns
are factors whose
employment ________
(decreases) as output
increases (decreases).
are factors whose
employment
______________ when
output changes.
Fixed factors and variable factors
Fixed factors
factory buildings, land,
machinery
increases
raw materials, labour,
fuel and electricity
remains constant
Examples
Variable factors
Definition
A firm can increase its
output by employing more
_____________ only.
Short run and long run
A period when there are
both ___________ and
_____________.
fixed factors
variable factors
variable factors
Short run Long run
A period when all factors
of production are
_______.
variable
A firm can increase its
output by increasing the
use of _________.
all factors
Assume there are two factors only: capital (fixed) and
labour (variable). Technology is constant.
Input-output relationship in the short run
4
10
20
28
34
38
40
40
39
37
1
2
3
4
5
6
7
8
9
10
Total product
(units)
Labour The total product (TP) of labour
is the total output produced by
______ in a ____________,
holding ______ constant.
period of time labour
capital
Input-output relationship in the short run
4
10
20
28
34
38
40
40
39
37
1
2
3
4
5
6
7
8
9
10
Total product
(units)
Labour
The average product (AP) of labour measures the output per
___________, holding capital constant.
unit of labour
Average product
(units)
4.00
5.00
6.67
7.00
6.80
6.33
5.71
5.00
4.33
3.70
Input-output relationship in the short run
4
10
20
28
34
38
40
40
39
37
1
2
3
4
5
6
7
8
9
10
Total product
(units)
Labour
The marginal product (MP) of labour measures the change in
total product as a result of changing the employment of
_______________, holding capital constant.
Marginal product
(units)
MP of nth unit
=_______________
_______________
TP of n units
- TP of (n - 1) units
MP ________
initially but
________
eventually.
increases
decreases
labour by one unit
4
6
10
8
6
4
2
0
-1
-2

4
6
10
8
6
4
2
0
-1
-2

The law of diminishing marginal returns
As more _____________ are added to a given quantity of
fixed factors, marginal product eventually _____.
variable factors
drops
Output
Variable factor
MP
Why do diminishing marginal returns occur ?
When more workers are added to a given amount of fixed
factors, the fixed factors are ________________; so MP
rises initially.
more fully utilised
Later, when more and more workers are added, there are
eventually too many _______ relative to the amount of
fixed factors.
workers
Why do diminishing marginal returns occur ?
When more workers are added to a given amount of fixed
factors, the fixed factors are ________________; so MP
rises initially.
more fully utilised
Efficiency will ______, leading to ______________.
decline diminishing MP
Take this challenge 1
Can you classify these items in the
boutique into fixed and variable
factors: (1) the shop; (2) the
salespersons and (3) electricity?
The shop: _____________ as the size of it remains
unchanged even if more clothes are sold.
fixed factor
The salespersons:
______________ as more
of them are needed to
provide services to more
customers.
variable factor
Electricity: ______________
as more electricity is used
along with longer business
hours.
variable factor
Take this challenge 1
Take this challenge 2
Find the total product and average
product schedule of our workers
from the following data:
MP 40 46 50 44 36 26 14
Units of
labour
1 2 3 4 5 6 7
Units of
tools
4 4 4 4 4 4 4
The total product of n units
= _________________________________________
_________________________________________
MP of the 1
st
unit + MP of the 2
nd
unit +
+ MP of the nth unit
TP 40 86 136 180 216 242 256
Take this challenge 2
MP 40 46 50 44 36 26 14
Units of
labour
1 2 3 4 5 6 7
Units of
tools
4 4 4 4 4 4 4
The average product of n units
= _______________________
AP = TP / units of labour
AP
40 43 45.3 45 43.2 40.3 36.6
Take this challenge 2
TP 40 86 136 180 216 242 256
MP 40 46 50 44 36 26 14
Units of
labour
1 2 3 4 5 6 7
Units of
tools
4 4 4 4 4 4 4
Does the law of diminishing marginal returns apply to the
factory?
Take this challenge 2
Yes / No, as more workers are added to a fixed quantity
of tools, marginal product eventually increases / drops.
AP
40 43 45.3 45 43.2 40.3 36.6
TP 40 86 136 180 216 242 256
MP 40 46 50 44 36 26 14
Units of
labour
1 2 3 4 5 6 7
Units of
tools
4 4 4 4 4 4 4
Take this challenge 3
The following table shows the marginal
product schedule of factory A:
Which economic law does not hold as shown by the above
data? Explain.
_____________________________________ as the MP
eventually is increasing.
The law of diminishing marginal returns
MP 20 15 10 18 23 35 43
Units of
labour
1 2 3 4 5 6 7
Units of
machines
7 7 7 7 7 7 7