Micro Week4 - Microeconomics Essay Example
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1.Law of diminishing returns states that there is a certain level of production wherein an increase on one of the inputs holding other things constant results in a decrease in output (Costales, Economics: Principles and Applications).
Marginal product (MP) is the rate of change in output as an input is increased by one unit, holding other factors constant, whereas, average product (AP) is the measure of the total output per unit input used (Costales, Economics: Principles and Applications). The MP for every production is declining attributed to the law of diminishing returns. On the other hand, AP is a fixed number which is commonly associated to the efficiency of the production, the higher the AP, the more efficient it is in physical terms.
The combination of the MP and AP constitute the 3 stages of production for labor: Stages I, II and III are shown in Figure 1.
Figure 1. Stages of Production. (Source: Costales, Economics: Principles and Applications)
Stage I shows that the production is increasing. At this stage MP and AP are also increasing. Stage II, on the other hand, is an increasing at a decreasing rate production. This is where the law of diminishing returns can be observed. Nevertheless, Stage II is the most important stage because it is the stage where the production is at its peak. The allocation of input-output is efficient. Last, the Stage III shows the massive decline in the production, still brought about by the law of diminishing returns.
2. To be able to determine the optimal combination of inputs. The constraints must be considered, which is usually in the form of a budget constraint. The optimal combination of inputs then causes a profit maximizing condition of the firm. Cost minimization is one of which of the factors to be considered in profit maximization.
Figure 2. Cost minimization (“Production of Choice and Inputs”)
The isocost represents the line (budget line) wherein every point in the line costs the same. On the other hand, isoquant is a curve wherein all the points in the curve correspond to the same level of production. The slope of the isoquant can be expressed as the Marginal Rate of Technical Substitution (MRTS), the rate in which the producer can substitute between two inputs but still have the same level of production. The intersection of the two leads to the optimal choice of inputs for a certain production.
3. Laborers often protest to be able to earn a minimum wage rate. However, these are not often considered by the employers. This is because the firm must increase the cost of production (wages of the employees) to be able to satisfy the wage rate problem. If the firm does not have excess resources, the firm may opt to lay-off workers just to please the employees. The clamor for the wage rate continues and the firms still are not able to increase wages. Should their wages increase, some of them will not be able to work anymore.
Costales, A.C., A.L. Bello, M. A. O. Catelo, A. C. Cuevas, G. I. Galinato and U-P. E. Rodriguez. Economics: Principles and Applications. Quezon City: JMC Press, Inc., 2000.
“Production of Choice and Inputs.” (n.d.) 22 October 2007 <http://classes.maxwell.syr.edu/ecn301004/t4_new.doc>