THEORY OF PRODUCTION

The Law of DMP 1

The Law of Diminishing Marginal Returns
The Law of DMP 2
 Fixed factor and variable factors
Fixed factors Variable factors
Definition Its employment Its employment
remains constant when
_______________ increases
________ as output
output increases. increases.
Examples factory buildings, land, raw materials, labour,
capital tools and fuel and electricity
entrepreneurial skills

The Law of DMP 3

 Short run and long run

Short run Long run

A period when there are A period when all factors

fixed factors and
both ___________ variable
are ________.
variable factors
_____________.
A firm can expand output A firm can expand output
by employing more by increasing the use of
variable factors only.
______________ __________.
all factors

The Law of DMP 4

 Input-output relationship in the short run
Assume there are two factors only: capital (fixed) and
labour (variable). Technology is constant.
Total product
Labour
(units)
The total product of labour is the
1 4
labour
total output produced by ______
2 10 given period of time holding
in a _________________,
3 20 capital and technology constant.
__________________
4 28
5 34
6 38
7 40
TP ________
increases initially and
8 40 decreases
________ eventually with
9 39 increasing amount of workers.
10 37
The Law of DMP 5
 Input-output relationship in the short run
Average product (AP) is total product divided by the
________________.
number of workers

Total product Average product

Labour
(units) (units)
1 4 4.00 increases
AP ________
2 10 5.00
3 20 6.60
initially but
4 28 7.00 decreases
________
5 34 6.80 eventually.
6 38 6.34
7 40 5.72
8 40 5.00
9 39 4.34
10 37 3.70
The Law of DMP 6
 Input-output relationship in the short run
Marginal product (MP) is the change in total product as a
result of _______________.
a change in input

Total product Marginal product MP of nth unit

Labour
(units) (units)
TP of n units
=_______________
1 4 4
2 10 6
- TP of (n-1) units
_______________
3 20 10
4 28 8 increases
MP ________
5 34 6 initially but
6 38 4 decreases
________
7 40 2
8 40 0 eventually.
9 39 -1
10 37 -2
The Law of DMP 7
 Law of diminishing marginal returns

variable factors are added to a given

As more and more _____________
technology constant,
quantity of fixed factors, holding __________
marginal product eventually _____.
drops
Outpu
t

MP
Variable factor

The Law of DMP 8

The Law of DMP 9
 Why do diminishing marginal returns occur ?
When more workers are added to a given amount of fixed
factors, the fixed factors are ________________;
more fully utilised so MP
rises initially.

Later, when more and more workers are added, there are
workers relative to the amount of
eventually too many _______
fixed factors.
The Law of DMP 10
 Why do diminishing marginal returns occur ?
When more workers are added to a given amount of fixed
factors, the fixed factors are ________________;
more fully utilised so MP
rises initially.

decline leading to ______________.

Efficiency will ______, diminishing MP

The Law of DMP 11

 Quiz One

Can you classify these items in the

boutique into fixed and variable
factors: (1) the shop; (2) the
salespersons and (3) electricity?

The Law of DMP 12

 Quiz One
Electricity: variable factor
______________
as more electricity is used
along with longer business
hours.

The salespersons:
variable factor as more
______________
of them are needed to
persuade customers to
buy more.

The shop: _____________

fixed factor as the size of it remains
unchanged even if more clothes are sold.
The Law of DMP 13
 Quiz Two

Find the total product and average

product schedule of our workers
from the following data:
Units of
labour 1 2 3 4 5 6 7

MP 40 46 50 44 36 26 14

The Law of DMP 14

 Quiz Two

Units of
labour 1 2 3 4 5 6 7

MP 40 46 50 44 36 26 14
TP 40 86 136 180 216 242 256

The total product of n units

MP of the 1st unit + MP of the 2nd unit + …
= _________________________________________
+ MP of the nth unit
_________________________________________
The Law of DMP 15
 Quiz Two

Units of
labour 1 2 3 4 5 6 7

MP 40 46 50 44 36 26 14
TP 40 86 136 180 216 242 256

AP 40 43 45.4 45 43.2 40.3 36.6

The average product of n units

AP = TP / units of
= _______________________
labour

The Law of DMP 16

 Quiz Three

The following table shows the marginal

product schedule of factory A:
Units of
labour 1 2 3 4 5 6 7

MP 20 15 10 18 23 35 43

Which law in economics is violated by the above data?

Explain.
The law of diminishing marginal returns
______________________________________ is violated
as the MP eventually increases.
The Law of DMP 17
 Quiz Three

The following table shows the marginal

product schedule of factory A:
Units of
labour 1 2 3 4 5 6 7

MP 20 15 10 18 23 35 43

TP 20 35 45 63 86 121 164

Find the TP schedule for factory A.

The Law of DMP 18

The Lessons of Diminishing Returns:

1.The size of a resource, given the rest as fixed should not go

beyond its product-maximizing point.

2. The plant capacity can only increase with more resources

combined unless technology changes.

3. Resources are basically complementary

The Law of DMP 19

Basic Ways to Improve Efficiency:

1.Change the nature of the resource through innovation.

2. Change the external condition of resources such as the

organization of work.

3. Utilization of resource-saving technology

The Law of DMP 20

END

The Law of DMP 21