Welcome To My Presentation Victoria Wendler Erasmus 2011/2012 Economics Prof. Galeazzi

Topics Diminishing Marginal Product Diseconomies Of Scale Constant Returns To Scale

Diminishing Marginal Product What is a marginal product? The marginal product of the input is the growth of the output, which is produced by using one extra unit of the inputfactor. Production function Y=f(X) X is the input and Y the output.

The diminishing marginal product is a decrease in the marginal output of a production process as a result of increasing the input with one unit. The law of diminishing marginal returns states that the marginal product of the variable input decreases at some point if you use more and more of a variable input combined with a fixed input in a short- run production. First the output grows with every extra unit of the input. When the maximum is reached, the course of the curve changes. From this point the marginal product decreases if the amount of an input factor in a production process increases.

Example If I am hungry, i will eat a pizza. After this pizza I feel better but still hungry. Thus I eat another one. After this pizza I feel much more better. If I continue eating pizza, I start feeling worse. The pizza is the input factor. My well-being is the output. Eating a pizza makes me feel better. But at one point, when i am not hungry anymore, eating more pizza causes a stomach ache. That means, first putting one more unit of input increases the output. But at one point the increase of an input doesn‘t increase the output but decrease it. Diminishing marginal product means, that adding more of one factor of production will at some point lead to lower output units.

Diseconomies of scale What are economies of scale? Economies of sclae refer to reduction in costs in a long run concept if the size of inputs increases. Reasons: -The costs for every product decrease because of a bigger amount of output. -The division of the fix costs to a bigger amount of output leads to decreasing average costs in production. Economies of scale, diseconomies of scale and constant returns to scale are related terms. They describe what happens if the amount of production increases. An increase in the number of units produced causes a decrease in the average cost of each unit.

Diseconomies Of Sclae Diseconomies of scale describe the opposite of economies of scale. In some situations economies of scale don‘t work for a firm. The costs for the production do not decrease with the increase of the production but the average costs increase when the output increases. That means the efficiency in the making of a product by producing more of it decreases.

Diseconomies Of Scale Reasons: 1)Transportation If the output increases, the costs to transport the goods to distant markets can increase enough to offset the economies of scale. 2) Motivation In a larger firm workers sometimes feel isolated and their motivation goes away. Lower motivation can lead to negative consequences for output and quality. Increasing the size of a business does not always lead to lower costs for a production unit. Diseconomies of scale are a result of difficulties of managing a bigger workface. 3) Increasing costs for business management, invoicing,…

Returns to scale describe the relationship between inputs and outputs in a long-run production function. Constant Returns To Scale Suppose our inputs are for example capital or labor and we increase the amount of inputs by using a multiplier a. The multiplier a must always be greater than 1. For instance: if the multiplier is 1,1 that means that we increase our inputs by 10%. If the multiplier is 2, we double the amount of inputs. What are returns to scale?

We want to know, how our output looks like. Constant returns to scale (CRTS): If our inputs x 1, x 2,.. increase by a, our output increase by exactly a. Productionfunction: : f(a*x 1, a*x 2,…) = a* f(x 1, x 2,…) Example: K is capital, L is labour, Q is quantity. Q= 2K + 3L Q`= 2(K*a) + 3(L*a) = 2*K*a + 3*L*a = a(2*K+3*L) = a*Q

Constant Returns to Scale A production function shows constant returns to scale if a change of the inputs by a positive factor a leads to increasing outputs by exactly that factor. The graph shows that if the output increases, the long run average total cost curve decreases in economies of scale, stays constant in constant returns to scale and increases in diseconomies of scale

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