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Costs, Revenues and Profits

Costs, revenues and profits: Law of diminishing returns

  • 3 things to know
  • A2 Units 3 and 4

Overview

Recall questions on The law of diminishing returns.

What you need to know

Answer each one before you reveal it.

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Key term

In the law of diminishing returns, what happens when a variable factor is added to a fixed factor?

Key term

What may happen to marginal product initially before diminishing returns set in?

Key term

Does diminishing returns always set in immediately when adding more of a variable factor?

Questions from this subtopic

Each one with the model answer underneath.

  1. 1

    What is the law of diminishing returns?

    Model answer

    As additional units of a variable factor (e.g. labour) are added to a fixed factor (e.g. capital), the marginal product of the variable factor will eventually decline.

  2. 2

    In the law of diminishing returns, what happens when a variable factor is added to a fixed factor?

    Model answer

    The marginal product of the variable factor will eventually decline as more units are added.

  3. 3

    What may happen to marginal product initially before diminishing returns set in?

    Model answer

    Initially marginal product may rise or stay constant before eventually falling.

  4. 4

    Does diminishing returns always set in immediately when adding more of a variable factor?

    Model answer

    No, there may be an initial phase where marginal product rises before it begins to fall.

  5. 5

    Define fixed costs.

    Model answer

    Costs that do not vary with the level of output in the short run.

  6. 6

    Define variable costs.

    Model answer

    Costs that change directly with the level of output.

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