law of diminishing returns

Production in the Short Run

Short run is a period of time when at least one of the factors of production is fixed. Usually labour is the easiest factor to change. Thus in short run a firm can increase production only by employing more labour because no more land or capital is available. Thus, labour is the variable factor in the short run.

'Short run' for various firms is different. It may be few days for some industries and may be years for some industries.

Production function

It is the equation that expresses the relationship between the quantities of productive factors (such as labour and capital) used and the amount of product obtained. It states the amount of product that can be obtained from every combination of factors, assuming that the most efficient available methods of production are used.

©Principles of economics, Libby Rittenberg

Law of increasing returns

This states that as more units of variable factor are added to a fixed factor, output will first rise more than proportionately. Thus, the firm experiences increasing returns.

Law of diminishing returns

The law states that as more units of a variable factor are added to a fixed factor, there will come a point when output will rise less than proportionately. The firm experiences diminishing returns.

©Principles of economics, Libby Rittenberg

This graph shows firm's total product curve with the ranges of increasing marginal returns, diminishing marginal returns, and negative marginal returns marked. This firm experiences increasing marginal returns between 0 and 3 units of labor per day, diminishing marginal returns between 3 and 7 units of labor per day, and negative marginal returns beyond the 7th unit of labor.

Marginal product

Marginal product of labour is the change in total output when one more worker is employed.
It can be calculated as

Change in total product

Change in number of workers

Average product

Average product of labour is the total product divided by the number of workers producing it. In other words, output each worker.

Total product

Number of workers

Total foxed cost diagram image to copy

Total Fixed Cost

Total fixed cost will remain constant even though output changes.

Average Fixed Cost

Average fixed cost will fall as output increases.

What is long run production?

Production in the Long run

In the long run there are no fixed factors of production. All factors are variable, and firms are therefore able to adjust their input of all factors of production. The process of change of input of all factors of production is the change in the scale of production.

When a firm changes it inputs but the change in output is more than the change input, the firms is said to be experiencing increasing returns to scale. On the other hand, when a firm’s output experiences a less proportionate increase as compared to the increase in input, it is said to be diminishing returns to scale.

A firm experiencing an increased return to scale will find its average costs falling. This is termed as economies of scale. Whereas, a rise in average cost of production due to diminishing return to scale are termed as diseconomies of scale.

Long run cost curves

In the long run all the factors of production are Variable and a firm can expand or decrease the level of output by varying its variable factors.

There is no time dimension as to determine whether it is short run or long run. When the firm can alter it fixed factors, it is said to be a long run.

Long run Total Cost (LRTC)

It is the total cost incurred as a result of producing a commodity in the long run. It can start from 0 as there is not fixed cost.
Long run total cost will initially increase at a decreasing rate and then at an increasing rate due to law of return to scale.

Long run Average Cost (LRAC)

It is U shaped. In the long run, as output increase, the average cost will fall due to internal economies of scale. As output increases further, average cost will remain constant and if the output is increased further, the average cost will increase again due to internal diseconomies of scale.

What is economies of scale?

What are economies of scale?

Economies of scale are the cost advantages that enterprises obtain due to size, with cost per unit of output generally decreasing with increasing scale as fixed costs are spread out over more units of output.

Type of economies of scale

These can be classified into five categories:

Purchasing economies:

When business buys in large quantities, they are able to get discounts and special prices because of buying in bulk. This reduces the unit cost of raw materials and a firm gets an advantage over other smaller firms.

Marketing economies:

The cost of advertising and distribution rises at a lower rate than rises in output and sales. In proportion to sales, large firms can advertise more cheaply and more effectively than their smaller rivals.

Financial economies:

A larger company tends to present a more secure investment; they find it easier to raise finance.Banks and other lending institutions treat large firms more favorably and these firms are in a position to negotiate loans with preferential interest rates. Further, large companies can issue shares and raise additional capital.

Managerial economies:

A large company benefits from the services of specialist functional managers. These firms can employ a number of highly specialized members on its management team, such as accountants, marketing managers which results in better decision being taken and reduction in overall unit costs.

Technical economies:

In large scale plants there are advantages in terms of the availability and use of specialist, indivisible equipment which are not available to small firms. Large manufacturing firms often use flow production methods and apply the principle of the division of labour. This use of flow production and the latest equipment will reduce the average costs of the large manufacturing businesses.

What is revenue?

It is the value of sales of a firm’s products. It is the income from sales of goods and services.

Quantity sold X Price

Total Revenue is also known as turnover.

Average revenue refers to the revenue of the firm by selling per unit commodity.  It is calculated as:

Total revenue/number of products sold

Marginal Revenue is the change in the total revenue from the sale of an additional unit.

It is calculated as

Change in total revenue/change in quantity

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Thailand's economy avoids technical recession

Domestic spending in Thailand picked up in the second quarter

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Thailand's economy avoided a technical recession in the second quarter, suggesting the country may be back on the path to growth following a military coup in May.

Gross domestic product (GDP) expanded by 0.9% in the three months to June, compared with the previous quarter.

On an annual basis, the Thai economy grew by 0.4% from a year earlier.

Months of political turmoil before the coup caused a drop in exports, foreign investment and tourism.

Krystal Tan from Capital Economics said the coup helped calm political unrest and boost confidence in the economy.

"Growth is set to pick up further in the coming quarters, but it will take time for the recovery to gain a firmer footing," she said.

"The junta has made spurring the Thai economy one of its top priorities since coming to power. For instance, its moves to delay tax hikes, accelerate budget disbursements and clear the way for investment approvals to resume should help support domestic demand."

Thailand's National Economic and Social Development Board, which compiles the growth data, also released revisions to its first quarter figures.

The revised figures show the economy contracted by 1.9% rather than the 2.1% decline initially reported for the period from January to March.

A technical recession is defined as two consecutive quarters of negative growth.