Assignment Topic: DIMINISHING MARGINAL RETURNS

Assignment Question:

Question 1:

Explain and illustrate with diagrams the differences between diminishing marginal returns and decreasing economies of scale and cite causes and examples.

Question 2

Suppose the jeans industry is an oligopoly in which each firm sells its own distinctive brand of jeans., and each firm believes its rivals will not follow its price increases but will follow its price cuts.

Draw and explain the demand curve facing each firm, and given this demand curve, does this mean that firms in the jeans industry do or do not compete against one another?

Question 3:

(a)      Discuss the following statement:  ‘In the real world there is no industry which conforms precisely to the economist’s model of perfect competition.  This means that the model is of little practical value’. (2.5 marks)

(b)       Illustrate with a diagram and explain the short-run perfectively competitive equilibrium for both (i) the individual firm and (ii) the industry;  (2.5 marks for diagram and 2.5 marks for explanation)

(c)      Illustrate with a diagram and explain the long-run perfectly competitive equilibrium for the firm

Question 4:

(a)      Explain and illustrate using a diagram why a monopolist would never produce in the inelastic range of the demand curve.  (3 marks for explanation, 3 marks for diagram)

(b)      In each of the following cases, state whether the monopolist would increase or decrease output:

(i)    Marginal revenue exceeds marginal cost at the output produced;  (2 marks)

(ii)   Marginal cost exceeds marginal revenue at the output produced.  (2 marks)

Question 5:

 (a)   Outline a micro-economic reform issue that is relevant to the Australian economy (i.e. why has there been reform in this industry or market? (5 marks)

(b)  How successful do you think these reform measures were and say why referring to some data or research that has been performed (5 marks).

Assignment Overview:-

Diminishing marginal returns is the decrease in output of a process when one of the factors of production is increased while the other factors are kept constant. This is to say that in the diminishing marginal returns the capacity of production of the factors that are kept constant is reached and thus increasing the other factor does not result in increased production, which is the main cause of diminishing marginal returns.

The diagram above shows the diminishing marginal returns as the number of workers are increased but the land and other factors are kept constant (Gillespie, 2011). As shown after a certain number of workers is increased the output first increases at a lower rate and after some time it starts declining.

Decreasing returns to scale is the situation where a proportionate increase in the resources brings about the change in the production which is less than the proportionate change in resources. For example if the resources like capital, labour and raw material are increased by 10% but the production of finished goods is increased by 8% is the case of decreasing returns to scale.

The main concern in the decreasing returns to scale is the production. If the production is increasing at a lower rate than the increase in resources of production the decreasing returns to scale will exist.

Thus the major difference between diminishing marginal returns and decreasing returns to scale considers factors that are fixed and also the factors that are variable and thus studies the impact on production whereas in the decreasing economies of scale is the advantage that is no longer available by increasing all the factors of production (Besanko, 2008) i.e. all the factors are variable in decreasing economies to scale.

In case of oligopoly market where the firms are competing on the price will lead to a situation similar to the competitive market.

LI80

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