Diminishing Returns

Diminishing Returns

100

What happens to marginal output when more variable inputs are added?

Answer: Marginal output begins to decrease as more variable inputs are added to fixed inputs.

200

Define diminishing returns in one sentence

• Answer: Diminishing returns occur when adding more of a variable input to a fixed input results in smaller increases in output.

300

Provide an example of diminishing returns in a production setting.

Answer: An example is a factory where adding more workers leads to less additional output due to limited machinery.

400

Explain how diminishing returns affect marginal cost

• As diminishing returns set in, marginal costs increase because more inputs are needed to produce each additional unit of output.

500

What is the relationship between diminishing returns and supply curves?

• : Diminishing returns lead to increasing marginal costs, which typically causes the supply curve to slope upward.

Supply

100

What is the law of supply?

• The law of supply states that as the price of a good increases, the quantity supplied also increases,vice versa, ceteris paribus ( all other factors held constant)

200

How does price affect the quantity supplied?

Higher prices incentivize producers to supply more of the good, while lower prices discourage supply. As prices increase it becomes more profitable for producers so qs increases. 

300

Define marginal cost in relation to supply.

• Marginal cost is the additional cost incurred from producing one more unit of a good or service.

400

What happens to supply when production costs increase?

• When production costs increase, the supply curve shifts to the left, indicating a decrease in supply at all price levels.

500

Explain how elasticity of supply affects market prices.

• If supply is elastic, small changes in price will result in large changes in quantity supplied; if inelastic, prices can increase without a significant change in quantity supplied.

Production costs

100

What are fixed costs?

• Fixed costs are expenses that do not change with the level of output, such as rent or salaries.

200

Give an example of variable costs

Examples of variable costs include raw materials, direct labor, and utility costs that change with production levels

300

How do total costs relate to average costs?

• Total costs are the sum of fixed and variable costs, while average costs are calculated by dividing total costs by the number of units produced.

400

What is the significance of average variable costs?

• Average variable costs help determine pricing strategies and profitability as they indicate the cost of production per unit in relation to output.

500

Explain how marginal costs influence production decisions

• : Producers will continue to produce additional units as long as the price they receive is greater than or equal to the marginal cost of production.

Economic Models

100

What is a supply curve?

A supply curve is a graphical representation showing the relationship between the price of a good and the quantity supplied.

200

Describe how to construct a supply schedule.

• : A supply schedule is created by listing various prices and the corresponding quantities that producers are willing to supply at those prices.

300

Explain the purpose of a production possibility frontier.

• A production possibility frontier illustrates the maximum potential output of two goods given available resources and technology.

400

What is the significance of price elasticity in economics?

• Price elasticity measures how responsive the quantity demanded or supplied is to a change in price, affecting revenue and market behavior.

500

How do changes in consumer demand affect supply curves?

• : An increase in consumer demand shifts the demand curve to the right, leading to higher prices and an increase in quantity supplied.