Economics Section 4.1.4- Production, Costs and Revenue
The Law of Diminishing Returns
The LoDR states that, as more units of variable input are added to the fixed factor input (capital and/or
land), the changes in total output will rise but then fall.
Total output will increase at a decreasing rate
Long Run Returns to Scale
How the output of a business responds to a change in inputs
The nature of the returns to scale affects the shape of a firm's long-run average cost curve- if a firm has a
sizeable increasing returns to scale, economies of scale is likely to be achieved in the LR.
A firm therefore needs to combine labour and capital in a way that MAXIMISES PRODUCTIVITY and
REDUCES UNIT COSTS.
Capital-Labour substitution is being used commonly with rise in capital intensity- however, capital is also
being used alongside labour in some production lines, e.g. Nissan Sunderland
The Law of Diminishing Returns
The LoDR states that, as more units of variable input are added to the fixed factor input (capital and/or
land), the changes in total output will rise but then fall.
Total output will increase at a decreasing rate
Long Run Returns to Scale
How the output of a business responds to a change in inputs
The nature of the returns to scale affects the shape of a firm's long-run average cost curve- if a firm has a
sizeable increasing returns to scale, economies of scale is likely to be achieved in the LR.
A firm therefore needs to combine labour and capital in a way that MAXIMISES PRODUCTIVITY and
REDUCES UNIT COSTS.
Capital-Labour substitution is being used commonly with rise in capital intensity- however, capital is also
being used alongside labour in some production lines, e.g. Nissan Sunderland
