Opportunity cost and the law of diminishing returns. Changes in the volume and costs of production in the short term. The law of diminishing returns. Marginal and Average Product The Law of Reducing the Marginal Return

Factors of production must be used by the firm in compliance with a certain proportionality between constant and variable factors. It is impossible to arbitrarily increase the number of variable factors per unit of a constant factor, since in this case law of diminishing returns(see 2.3).

In accordance with this law, a continuous increase in the use of one variable resource in combination with an unchanged amount of other resources at a certain stage will lead to the termination of the growth of returns, and then to its decrease. Often the operation of the law presupposes the invariability of the technological level of production, and therefore the transition to a more advanced technology can increase returns regardless of the ratio of constant and variable factors.

Let us consider in more detail how the return on a variable factor (resource) changes in a short time interval, when a part of the resources or production factors remains constant. Indeed, for a short period, as already noted, the company cannot change the scale of production, build new workshops, purchase new equipment, etc.

Let us assume that the firm in its activities uses only one variable resource - labor, the return of which is productivity. How will the costs of the firm change with a gradual increase in the number of hired workers? First, consider how output will change with an increase in the number of workers. As the equipment is loaded, production increases rapidly, then the increase gradually slows down until there are enough workers to fully load the equipment. If you continue to hire workers, they will no longer be able to add anything to the volume of production. Eventually there will be so many workers that they will interfere with each other, and the output will be reduced.

See also:

2 The law of diminishing returns.

The interchangeability of factors of production provides the commodity producer with a production choice. However, in real life, a specific entrepreneur is more interested in the question of what the output will be if additional resources are involved in the production process. Imagine a Minsk worsted mill, where one weaver uses technology to serve 10 looms. The number of looms can be increased while the number of weavers remains the same. Undoubtedly, an increase in machine tool equipment will lead to an increase in production output. But a weaver will not be able to service 15 looms as efficiently as 10, and 20 as efficiently as 15. Therefore, despite the general increase in the volume of output, the increase in the output of goods from the use of each subsequent loom, with the number of weavers unchanged, will be less than from the previous one.

The opposite situation can also be imagined: without increasing the number of looms, employ more weavers. Then each worker will service less equipment and the machines will work better. But the productivity of the equipment is limited, so the output of the weavers will decrease.

Thus, at a certain level of scientific and technological progress, an increase in investment in the production of one type of resource with a constant amount of the rest leads to a diminishing return on this resource or, starting from a certain time, the successive attachment of units of a variable resource to an unchanged fixed resource gives a decreasing increase in this resource.

The law of diminishing returns applies under certain conditions.

1 First, all units of the variable factor are homogeneous. In relation to labor, for example, this would mean that each additional worker has the same mental abilities, qualifications, skills, coordination of movements, education, labor skills, etc., as previously adopted.

2 Secondly, the law presupposes the constancy of the technical and technological level. If there is technical progress, then there will be a progressive shift in the aggregate product curve towards growth.

3 Thirdly, the law presupposes the immutability of at least one factor of production.

Consider the action of the law of diminishing returns on a specific example

The law of diminishing returns

Variable factor, L	TR	MR	AR	Constant factor, capital
0	0	-	-	20
1	10	10	10	20
2	25	15	12,5	20
3	37	12	12,3	20
4	47	10	11,75	20
5	5	8	11	20
6	60	5	10	20
7	63	3	9	20
8	63	0	7,875	20
9	62	-1	6,89	20

This hypothetical material can be used to construct the corresponding curves

3 Manufacturing. Aggregate (total), average and marginal product.

The total, or aggregate, product (TP) of a variable factor is the total amount of products produced in physical terms, which increases as the use of one variable resource increases, all other conditions being unchanged.

If the total (aggregate) product is divided by the amount of variable factor used in production, for example, labor (L) or capital (K), we get the indicator of the average product (AR):

AP L = TP / L

where AR is the average product of the variable factor;

K - variable resource (capital) or L - variable resource (labor).

The marginal product (MP) is an additional output of products, which is achieved by increasing the use of a variable resource with a constant amount of other resources:

MP = DTP / DK or MP = DTP / DL

where MR is the marginal product of capital or labor;

DTP is a change in the total volume of production corresponding to a change in the DK or DL units of capital or labor used with the same number of other factors.

The overall product curve goes through three phases. First of all, it rises at an accelerating rate; then its growth occurs at a slower pace; finally peaks and begins to decline. The marginal product curve reflects the specifics of the movement of the total product. The point is that the marginal product is the slope of the total product curve. In other words, marginal product measures the change in total product associated with the addition of an additional worker. Accordingly, all phases of the movement of the aggregate product are reflected in the dynamics of the limiting product. While the total product is growing at an accelerated rate, the marginal product is increasing.

The phase of growth of the aggregate product at a slower rate corresponds to a fall in the marginal product, which remains positive. The marginal product becomes negative when the total product reaches its maximum.

The average and marginal product is also characterized by a certain relationship. As long as the marginal product exceeds the average, the latter increases. If the marginal product is less than the average, then the latter falls. The intersection point E of these two curves defines the maximum value of the average product.

Thus, the production can be divided into the following stages

Stage 1. It is associated with the beginning of production, when the number of labor resources is equal to 0, and continues until the moment when the marginal product and the average are equal to each other, and the latter reaches its maximum value.

Stage 2. Begins at the moment when the average product has the highest value, and continues until the marginal product of labor becomes equal to zero.

Stage 3. The marginal product becomes negative, the total begins to decline.

At the first stage, in a certain sense, there is an overexpenditure of resources, since the manufacturer bears the costs of equipment for the use of which he does not have enough workers. The firm could produce the same volume of production with less capital and the same amount of labor, since there is excess capacity. However, since the amount of capital is taken as a constant, there is no way to use it in smaller amounts.

Likewise, in the third stage, a large amount of labor is used in relation to capital. The marginal product of labor becomes negative, since workers interfere, producers are forced to pay each other for all hours of labor, which rather leads to a decrease than to an increase in the volume of production. A similar situation occurs at the first stage, when equipment is paid for that is not used due to insufficient labor resources.

It would be desirable for production organizers to avoid the first and third stages and stay at the second. Only in this case there is no surplus of effectively used labor and capital; there is no need to pay for unused production factors.

The additional cash income generated by the sale of the marginal product is the income from the marginal product.

It should be emphasized that the indicators of the average and marginal products characterize, respectively, the average and marginal productivity of a variable resource. For example, if the variable resource is labor, then the average product of labor expresses the productivity of the "average" worker, and the marginal one expresses the productivity of each additional worker used in production.

The essence of the law of diminishing productivity of factors of production is that with an increase in the use of one resource, while others remain unchanged, the marginal product of a variable factor will decrease. In other words, the increase in output is limited if only one factor changes. In this regard, the equality of two indicators is important - the marginal and average return of the factors of production. The excess of the average return over the marginal one is a signal that the effective expansion of production by increasing the use of only a factor is no longer possible. Changes are required in the entire set of factors used.

The validity of the law of diminishing productivity of factors of production can be easily illustrated with specific examples. Otherwise, for example, by involving additional workers in agriculture, it would be possible to feed the world's population from 1 hectare of fertile land.

The theory of marginal productivity is used only if the factors of production are interchangeable. If there is no such interchangeability, it is impossible to distinguish between the marginal product obtained by changing one factor from the marginal product obtained by changing other factors. In this case, the additional investment of one of the factors of production, while the others remain unchanged, only leads to an ineffective use of this resource without any impact on the volume of output.

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Literation

1 . The law of diminishing returns. Cumulative, average and marginal product curves (analytical and graphical interpretation)

The essence of the law of diminishing returns is that additional costs give less and less additional production. The law expresses the relationship between costs and the results of these costs. However, it should be borne in mind that the law of diminishing returns is valid when one factor of production changes and the rest remain unchanged. For example, income will change when additional workers are involved in the production process. Moreover, the additional amount of production received from an additional unit of labor will decrease. But this is with the remaining factors unchanged (equipment, technology).

At the same time, if a large amount of all resources are simultaneously involved in the production process (labor - the population has grown, new lands, advanced technologies, etc.) have been mastered, the return will increase. The increase in returns occurs on the basis of an increase in the scale of production.

The maximum value of the physical volume of a product produced by a certain value of a variable factor with a constant technological process is the total (gross or total) product TP (total product). If we assume that the variable factor is labor (L), and the constant is capital (K), then the increase in the total product of labor will be influenced by the labor force additionally involved in the labor process. Economics / Ed. A.I. Arkhipova, A.N. Nesterenko, A.K. Bolshakov. - M: Prospect, 2002 .-- S. 112.

The total product, calculated per unit of variable used in production, is the average product.

AP = TP / L = Q / L.

The average product measures the performance of a variable factor. If the variable factor is labor, then the size of the average product is labor productivity.

The change in the value of the total product as a result of a change in the unit of the variable factor used in production expresses the marginal product MP (marginal product). Marginal product measures the performance of an additional unit of a variable factor. If the variable factor is labor, then the productivity of the additional factor is called the marginal productivity of labor. The marginal product expresses the change in the total product (dQ) through infinitesimal increments of the variable factor (dL). Thus,

MPL = dQ / dL, or Q / L.

The law of diminishing marginal productivity shows that: starting from a certain period of time, an increase in the volume of use of one resource with a constant volume of another leads to a decrease in the marginal product of a variable factor.

The rule of substitution of factors of production is that the ratio of the increments of two resources is inversely related to the value of their marginal products.

The factors of production are divided into variable and constant. Variables include labor, raw materials, fuel, electricity, etc. The number of these factors can be easily changed by the firm (for example, hiring additional employees, more economical use of raw materials and fuel).

Permanent factors include buildings, heavy specialized equipment. In order to change these factors, it takes a long period of time for the firm to change the volume of all the factors of production used. Over a long period of time, all factors of production become variable. Therefore, the concept of "constant factors" is characteristic only for a short period.

If a firm reduces or increases production over a short period of time, then the change in output will not be proportional to the change in the number of variables. For example, in the short run, land and capital in agriculture are constant factors. During the fall season, the farmer harvests from a plot of land planted with a particular crop in the spring, that is, the size of the agricultural plot cannot be changed. Agricultural buildings and equipment remain permanent. However, the farmer can, with a good harvest, hire additional workers. Most importantly, even if all workers work at the same efficiency, each additional worker will add a different amount of output to the total output. Labor productivity, measured by the average product, as the number of workers increases, first increases, then reaches a maximum, and finally the moment comes when the average volume of production begins to decrease.

The dynamics of productivity is determined by the ratio between constant and variable factors. With a low level of workload of constant factors, an additional hired employee provides a significant increase in the total volume of production.

The further attraction of additional workers leads to the fact that the constant amount of land and capital is no longer enough for all workers to work with full dedication. With an increase in the number of employees, the total volume of production may increase, but the output per employee will gradually decrease.

There is a definite relationship between the marginal and average products. The average product is calculated by dividing the total product by the number of workers. If we represent the total, average and marginal products graphically (Fig. 1.1), then we can see that the line of the marginal product crosses the line of the average product at the maximum point of the latter. When the marginal product curve is above the average product curve, the average product increases. If the marginal product curve is below the average product curve, then the average product decreases. Nureyev R.M. Microeconomics course. - M .: Norma-Infra-M, 2004 .-- S. 226.

At the same time, the value of the marginal product depends on the change in the total product.

Figure 1.1 - Total, average and marginal products of a variable resource (L) (fictitious values)

Thus, these quantities depend on each other. Similarly, you can consider this value depending on other factors of production.

2 . Loan interest rate, its types and role. Factors affecting the interest rate

Capital is a resource that has a long service life and is used to produce more economic goods. An entrepreneur, purchasing capital goods (machines, machine tools, etc.), must correlate the costs of their purchase and operation with the expected income from their use. Semenikhina V.A. Microeconomics. - Novosibirsk: Siberian Institute of Finance and Banking, 2003. - P. 215.

The demand for capital services is the demand for free cash that a firm needs to upgrade or purchase capital equipment. The funds are used by the entrepreneur in the investment process.

There are two ways to determine the profitability of an investment: by discounting, comparing the demand price DP, equal to the current present value PV, with the supply price of capital SP, or by comparing the expected rate of return on capital P "with the interest rate r.

The firm receives the maximum profit provided that the marginal income and the marginal cost per unit of capital are equal, i.e. MRPk = MRCk.

The marginal return of capital depends on the marginal return of the unit of capital MRk and the additional unit of production MPk obtained as a result of using the unit of capital: MRPk = MPk MRk.

In conditions of perfect competition, the interest rate is formed on the market, none of the lenders or borrowers can influence its value. The interest rate balances the supply and demand of savings and the marginal cost of capital (MRCk = i).

Equilibrium in the capital market looks like this (Fig. 2.1).

In the figure shown:

S is the money supply curve;

Di is the investment demand curve;

rE is the equilibrium interest rate;

QE is the equilibrium value of investment and savings.

Figure 2.1 - Capital market

If an entrepreneur borrows, then he necessarily compares the losses that he will incur due to the payment of interest, and the benefits that the acquisition of capital represents for him.

Savings are the source of borrowed funds. Economic practice shows that people who save, first, compare current consumption with future consumption, and, second, compare the most effective ways of distributing savings. The main role in this distribution is played by the interest rate.

The interest rate is the price paid to capital owners for the use of funds borrowed from them for a specified period. Despite the fact that the share of this percentage in the total factor income of the population is insignificant, many people have deposits in banks and receive income from this. L.P. Kurakov Economic theory. - M .: Press-service, 2000 .-- P. 56.

For the subject of the demand for capital, interest acts as a cost, for the subject of the supply of capital - as income. The lending rate depends on the supply and demand of borrowed funds; in reality, there is a wide range of rates. When making investment decisions, it is not the nominal interest rate (in current prices) that is taken into account, but the real one (cleared of inflation). Those. the real interest rate rr is the nominal rate rn minus the inflation rate i. rr = rn - i. These are the types of interest rates.

The interest rate is defined as the ratio of the amount of interest to the amount of the loan capital. If a loan is provided for several years and without an annual interest payment condition, then the total amount at the time the loan is repaid is determined using the compound interest formula. For example, in January 2006 a loan of 5000 rubles was provided. for five years at a rate of 25% per annum. Under these conditions, the total amount of capital by January 1, 2011 will be: 5,000 (1 + 0.25) 5 = 15,000 rubles.

In this case, the nominal lending rate is used, i.e. excluding inflation.

Banks most often act as intermediaries in the movement of loan capital. In this regard, one should distinguish between depository and loan interest rates.

Depository interest rates are used to calculate and pay interest on deposits with the bank. The accrued amounts are received by the depositors.

Loan interest rates are the normative fees for using a bank loan. The value of this interest rate depends on the degree of risk, urgency (it increases with an increase in the term), the size of the loan.

The factors on which the lending interest rate depends are shown in Figure 2.2.

Figure 2.2 - Factors affecting the lending rate

Desiring to maximize profits, each entrepreneur chooses a project that provides a rate of return greater than the market lending rate. Accordingly, the higher the depository interest rate, the more willingly the owners of capital are to abandon current consumption. Thus, the market interest rate plays an essential role in regulating economic processes. Through the market rate, limited monetary resources are used rationally. They target the most efficient, revenue-generating industries. At the same time, the market rate stimulates people's savings, promotes investment, without which it is impossible to establish large-scale production and receive stable profits. McConnell C.R., Bru C.L. Economics: principles, problems and politics. Per. from English - M .: Infra-M, 1999 .-- S. 337.

An important tool in determining investment efficiency is discounting.

Discounting is the procedure for calculating the present value of the amounts that can be received in the future at the present interest rate. Discounting allows you to compare the value of today's costs and future income. If the present value of the expected net income exceeds the investment cost, the firm decides to invest. When using the second method, the firm will invest if the expected level of return on capital is not less than or equal to the interest rate.

To make an investment decision based on the net present value, the discounted value of the expected income is calculated, which is compared with the investment. Hence, if the net present value is greater than zero, then the investment can be made. The present profit, with a positive indicator of the net present value, exceeds the volume of investments.

Thus, firms always compare costs with results, since making a profit is their main goal.

3 . Tests

1. Opportunity costs:

a) include explicit and implicit costs, including normal profit;

b) include explicit costs, but do not include implicit;

c) include implicit costs, but do not include explicit;

d) do not include either explicit or implicit;

e) exceed explicit and implicit costs by the amount of normal profit.

Opportunity cost is the cost of lost opportunity, so it is an implicit cost.

2. The supply curve of a competitive seller in the short run is:

a) the curve of marginal costs;

b) product price line;

c) the declining part of the average cost curve;

d) an increasing part of the average cost curve;

e) the part of the marginal cost curve located above the average variable costs.

The competitive seller's supply curve graphically coincides with the upward marginal cost curve, i.e. above average variable costs.

4 . Task

Let's say that a monopolist can sell 10 units. goods at a price of $ 100 per unit, but selling 11 units. will cause the price to drop to $ 99.5. What is the marginal revenue for increasing sales from 10 to 11 units?

The marginal revenue is calculated using the following formula:

where MR is the marginal income;

TR is the increase in total income;

Q is the increase in the quantity of goods sold.

We get:

MR = (1199.5 - 10100) / (11 - 10) = $ 94.5.

Answer: $ 94.5.

Literature

1. Kurakov L.P. Economic theory. - M .: Press-service, 2000 .-- 498 p.

2. McConnell K.R., Bru S.L. Economics: principles, problems and politics. Per. from English - M .: Infra-M, 1999 .-- 665 p.

3. Nureyev R.M. Microeconomics course. - M .: Norma-Infra-M, 2004 .-- 542 p.

4. Semenikhina V.A. Microeconomics. - Novosibirsk: Siberian Institute of Finance and Banking, 2003. - 235 p.

5. Economics / Ed. A.I. Arkhipova, A.N. Nesterenko, A.K. Bolshakov. - M: Prospect, 2002 .-- 250 p.

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Aggregate labor market supply

In conditions of perfect competition, the firm is not able to influence the price of its products, so it can get more profit only by reducing costs. Consequently, the first important task of the firm is to find such a combination of factors of production that will reduce costs to a minimum. This task is similar to consumer choice, and similar tools are used to solve it.

Experience shows that there is a direct relationship between the volume of output and the number of factors of production used. In this case, the factors of production are applied in a certain combination, which is dictated by technology. The relationship between any combination of production factors and the maximum possible output for it is expressed in production function(1.1):

Q = f (F 1, F 2, F 3 ... F n), (1.1)

where Q is the maximum output for a given technology and a combination of factors;

F 1… Fn - factors of production.

Each type of production has its own production function. However, they all have a number of common properties:

- if we assume that the costs of any one factor increase, and all other factors do not change, then a gradual decrease in the increase in the volume of production caused by the expansion of the use of this factor can be traced. This trend is called the law of diminishing returns variable factor of production.

Distinguish between general, average and marginal product of a variable factor of production ... General product Is the amount of products, the release of which is due to a certain value of this factor, provided that all other factors of production do not change ... Average product Is the output per unit factor (for example, labor productivity). Limit product Is the increase in the total product caused by the use of one additional unit of the variable factor.

Factors of production are characterized by interchangeability and complementarity. Any product can be produced by using various factors in various combinations.

It is important to distinguish between the short-term and long-term periods of the firm. This difference is not based on the length of time, but on the ability or impossibility to resize all the factors used. In the short run, some factors of production are constant, i.e. their application cannot be extended. Another part of the factors are variable factors, the size of which changes with the change in the volume of output.

In the long run, all factors of production are variable. If they change in the same proportion, then the scale of production changes, and the law of diminishing returns does not apply. Distinguish between positive, negative and constant economies of scale. Positive economies of scale mean that output grows faster than costs, and negative economies more slowly. With a constant economy of scale, output grows at a constant cost.

If we assume that only two factors of production are used - labor and capital, then the production function will take the form (1.2):

Q = f (K, L), (1.2)

where Q is the production function;

f (K) - labor;

f (L) - capital.

Its graphic representation is isoquant(constant quantity line). This is a curve, each point of which is a combination of labor and capital, providing a certain volume of output (see Fig. 1.1).

The law of diminishing returns

The effect of the law of diminishing returns was not taken into account in the pre-perestroika period of the functioning of the domestic economy. Concentration was considered one of the main directions of increasing production efficiency. The construction of the largest enterprises was a characteristic feature of all sectors of the economy.

The law of diminishing returns, or the law of diminishing marginal product, or the law of changing proportions, are all different names for the same law. Consider two definitions that explain the law of diminishing returns from different angles.

Marginal - close to the limit, on the edge. In Russian, the most accurate meaning is expressed by the words "additional", "additional".

The law of diminishing returns reads: as the use of any production factor increases (with the remaining production factors being fixed), a point is eventually reached at which additional use of this factor leads to a decrease in output.

Starting from a certain moment, the successive addition of units of a variable resource (for example, labor) to an unchanging, fixed resource (for example, capital or land) gives a decreasing additional, or marginal, product per each subsequent unit of a variable resource. In other words, if the number of employees serving a given direction of activity increases, then the growth of the volume of production will occur after a certain moment more and more slowly, as the number of workers in production increases.

In fact, if in your garden plot, without cultivating the land, you get a yield equal to 8 buckets (80 kg) from one hundred square meters, then after one cultivation of the land (weeding, watering, hilling) the yield will be 94 kg, after two treatments - 102 kg, after three - 105 kg. It is clear that the return of each subsequent processing with equal aggregate costs of living and materialized labor will decrease.

This law applies not only to agricultural production, but also to other industries. What happens if the number of workers increases to, say, 20 people?

The additional, or marginal, product of additional workers will be reduced. At the same time, we assume that each additional worker is equivalent to the main worker both in terms of individual productivity and in terms of qualifications. The marginal product begins to decline because more workers are employed with the same amount of capital funds.

Let's look at an example.

Table 1. Illustration of the law of diminishing returns: change in production volumes depending on changes in the value of variable resources

Investments of variable labor resources (number of workers) with a fixed equipment capacity	Total production (product units)	Maximum return (the difference between the values of the next and previous lines)		Average productivity
			Increasing



			Decreasing





			Negative

Table 1 provides a visual numerical illustration of the law of diminishing returns. Shown is the total amount of products that can be obtained as a result of combining a certain amount of labor resources with permanent resources (the value of the latter is assumed to be unchanged). The next column reflects the marginal productivity - shows the change in production volume associated with the investment of each additional unit of labor resource. Please note that in the absence of labor costs, the volume of production is zero (an enterprise without people cannot produce products). The emergence of the first three workers is accompanied by increasing returns, since their marginal products are 8, 12 and 16 units, respectively. However, in the future, starting with the fourth worker, the marginal product (the increase in the total volume of production) gradually decreases, so that for the ninth worker it is reduced to zero, and for the tenth - twelfth it has a negative value. Average productivity (or production per worker, also called labor productivity) is shown in the right hand column.

For clarity, we present a graphical representation of the resulting dependence. The second figure clearly shows three phases: 1) the total volume of production is increasing at an accelerating rate; 2) the rate of elevation slows down; 3) recoil decreases.

Rice. 1. The law of diminishing returns.

Rice. 2. Marginal and average productivity

(1 - average productivity, 2 - marginal productivity).

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