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BUSINESS ECONOMICS AND
THE DISTRIBUTION OF INCOME
ECONOMICS UNIT 3 Jefreena Catherin…read more

Slide 2

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Notes to do
Further growth
Industrial policy
Government failure…read more

Slide 3

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The Law Of Diminishing Returns
Long Run: Time Period in which the scale of all factors of production can be changed
Short Run: Time period which at least one factor of production is fixed
The law of Diminishing marginal returns: A short term law which states, as variable
factors of production ( labour) is added to fixed factors of production (land and capital),
eventually the marginal product of the variable factor will begin to fall
Marginal Product: The increase in total output arising from increasing variable FOP by
one unit…read more

Slide 4

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The Law of Diminishing Returns
Output
· In short run at least one FOP is fixed
· As more variable FOP are added total output will
increase
· However extra added by each additional variable
FOP will decrease
· By Dividing tasks among workers firms benefits
from specialisation- workers do not switch
between task, more and better machinery, practice
makes workers more efficient
· More and more labour is added to fixed plant and
machinery, eventually the marginal product falls
Why it happens
· Constraints of fixed factors of production
· Marginal product will eventually fall because
utilisation of fixed factors of production is
maximised…read more

Slide 5

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Fixed and Variable Cost
Fixed Cost: Do not vary with
Variable Cost: vary with output
output
· Examples of fixed cost: Salaries,
· Examples of variable cost:
rent, advertising, interest
wages, raw material and fuel
repayment, insurance
cost
· Average fixed cost will fall as
· Average total cost eventually
output increases because the
rise because as output
overhead is spread over a
increases any further spreading
greater range of output
of fixed cost become insufficient
ATC…read more

Slide 6

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LONG RUN PRODUCTION THEORY
Returns to scale: describes how output changes when
the scale of all factors of production changes in long
run
· In the long run firm can move from one short
run curve to the other which has different
scale capacity
· LRAC is line drawn tangent to SRATC curves
· Firms can change the scale of its production
to escape from the effect of short run cost
upon profit
· Increasing returns to scale: If an increase in the scale of all factors of
production cause more than proportionate increase in output
· Constant returns to scale: If increase in the scale of all factors of production
causes proportionate increase in output
· Decreasing returns to scale: If an increase in the scale of all factors of
production cause less than proportionate increase in output.…read more

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