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DEPAUL / Economics / ECON 105 / What is meant by the Law of Diminishing Returns?

What is meant by the Law of Diminishing Returns?

What is meant by the Law of Diminishing Returns?

Description

School: DePaul University
Department: Economics
Course: Priciples of Microeconomics
Professor: Anthony krautmann
Term: Winter 2016
Tags: Economics, Microeconomics, consumer demand, marginal utility, and cost-benefit analysis
Cost: 25
Name: Week 5 Notes
Description: Microeconomic Way of Thinking, Cost-benefit, marginal benefit, marginal utility, marginal cost, theory of consumer, rule of rational life, aggregating the demand market
Uploaded: 02/08/2016
5 Pages 145 Views 0 Unlocks
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li{counter-increment:lst-ctn-kix_49v901ur12k5-3}ul.lst-kix_hj7azyi5kemu-8{list-style-type:none}.lst-kix_ue8iqyatvq0b-1 > li:before{content:"- "}ol.lst-kix_pp8e5zvimfw6-0.start{counter-reset:lst-ctn-kix_pp8e5zvimfw6-0 0}.lst-kix_e6e3f1leki8h-1 > li:before{content:"- "}.lst-kix_pp8e5zvimfw6-4 > li{counter-increment:lst-ctn-kix_pp8e5zvimfw6-4}ul.lst-kix_qntsdqggvtb-7{list-style-type:none}ul.lst-kix_qntsdqggvtb-6{list-style-type:none}ul.lst-kix_qntsdqggvtb-8{list-style-type:none}.lst-kix_e6e3f1leki8h-3 > li:before{content:"- "}.lst-kix_e6e3f1leki8h-7 > li:before{content:"- "}ul.lst-kix_qntsdqggvtb-3{list-style-type:none}ul.lst-kix_qntsdqggvtb-2{list-style-type:none}ul.lst-kix_qntsdqggvtb-5{list-style-type:none}ul.lst-kix_qntsdqggvtb-4{list-style-type:none}ul.lst-kix_qntsdqggvtb-1{list-style-type:none}ul.lst-kix_qntsdqggvtb-0{list-style-type:none}.lst-kix_e6e3f1leki8h-5 > li:before{content:"- "}ol.lst-kix_pp8e5zvimfw6-1.start{counter-reset:lst-ctn-kix_pp8e5zvimfw6-1 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"}.lst-kix_3ra5q4xuafro-3 > li:before{content:"- "}ol.lst-kix_49v901ur12k5-3.start{counter-reset:lst-ctn-kix_49v901ur12k5-3 0}.lst-kix_3ra5q4xuafro-4 > li:before{content:"- "}.lst-kix_3ra5q4xuafro-5 > li:before{content:"- "}ol.lst-kix_pp8e5zvimfw6-2.start{counter-reset:lst-ctn-kix_pp8e5zvimfw6-2 0}.lst-kix_pp8e5zvimfw6-7 > li{counter-increment:lst-ctn-kix_pp8e5zvimfw6-7}ul.lst-kix_xc6nxzfx4xy9-2{list-style-type:none}ul.lst-kix_xc6nxzfx4xy9-3{list-style-type:none}ul.lst-kix_xc6nxzfx4xy9-4{list-style-type:none}ul.lst-kix_xc6nxzfx4xy9-5{list-style-type:none}ul.lst-kix_xc6nxzfx4xy9-0{list-style-type:none}ul.lst-kix_xc6nxzfx4xy9-1{list-style-type:none}.lst-kix_3ra5q4xuafro-8 > li:before{content:"- "}ul.lst-kix_58prw6nbu6kp-0{list-style-type:none}ul.lst-kix_58prw6nbu6kp-2{list-style-type:none}ul.lst-kix_58prw6nbu6kp-1{list-style-type:none}.lst-kix_pp8e5zvimfw6-5 > li{counter-increment:lst-ctn-kix_pp8e5zvimfw6-5}.lst-kix_49v901ur12k5-6 > li:before{content:"" counter(lst-ctn-kix_49v901ur12k5-6,decimal) ". "}.lst-kix_49v901ur12k5-5 > li:before{content:"" counter(lst-ctn-kix_49v901ur12k5-5,lower-roman) ". "}.lst-kix_49v901ur12k5-7 > li:before{content:"" counter(lst-ctn-kix_49v901ur12k5-7,lower-latin) ". "}.lst-kix_49v901ur12k5-8 > li{counter-increment:lst-ctn-kix_49v901ur12k5-8}.lst-kix_49v901ur12k5-4 > li:before{content:"" counter(lst-ctn-kix_49v901ur12k5-4,lower-latin) ". "}.lst-kix_49v901ur12k5-8 > li:before{content:"" counter(lst-ctn-kix_49v901ur12k5-8,lower-roman) ". "}.lst-kix_pp8e5zvimfw6-3 > li{counter-increment:lst-ctn-kix_pp8e5zvimfw6-3}.lst-kix_pp8e5zvimfw6-6 > li:before{content:"" counter(lst-ctn-kix_pp8e5zvimfw6-6,decimal) ". "}.lst-kix_pp8e5zvimfw6-8 > li:before{content:"" counter(lst-ctn-kix_pp8e5zvimfw6-8,lower-roman) ". "}.lst-kix_pp8e5zvimfw6-7 > li:before{content:"" counter(lst-ctn-kix_pp8e5zvimfw6-7,lower-latin) ". "}ul.lst-kix_5ye26eple4ct-0{list-style-type:none}ul.lst-kix_5ye26eple4ct-2{list-style-type:none}ul.lst-kix_xc6nxzfx4xy9-6{list-style-type:none}ul.lst-kix_5ye26eple4ct-1{list-style-type:none}ul.lst-kix_xc6nxzfx4xy9-7{list-style-type:none}ul.lst-kix_5ye26eple4ct-4{list-style-type:none}ul.lst-kix_xc6nxzfx4xy9-8{list-style-type:none}ul.lst-kix_5ye26eple4ct-3{list-style-type:none}ul.lst-kix_az8etb2koj6-4{list-style-type:none}ul.lst-kix_e6e3f1leki8h-3{list-style-type:none}ul.lst-kix_az8etb2koj6-3{list-style-type:none}ul.lst-kix_e6e3f1leki8h-2{list-style-type:none}ul.lst-kix_az8etb2koj6-6{list-style-type:none}ul.lst-kix_e6e3f1leki8h-1{list-style-type:none}ul.lst-kix_az8etb2koj6-5{list-style-type:none}.lst-kix_pp8e5zvimfw6-0 > li:before{content:"" counter(lst-ctn-kix_pp8e5zvimfw6-0,decimal) ". "}ul.lst-kix_e6e3f1leki8h-0{list-style-type:none}ul.lst-kix_az8etb2koj6-8{list-style-type:none}ul.lst-kix_e6e3f1leki8h-7{list-style-type:none}ul.lst-kix_az8etb2koj6-7{list-style-type:none}ul.lst-kix_e6e3f1leki8h-6{list-style-type:none}ul.lst-kix_e6e3f1leki8h-5{list-style-type:none}.lst-kix_pp8e5zvimfw6-3 > li:before{content:"" counter(lst-ctn-kix_pp8e5zvimfw6-3,decimal) ". "}ul.lst-kix_e6e3f1leki8h-4{list-style-type:none}.lst-kix_pp8e5zvimfw6-4 > li:before{content:"" counter(lst-ctn-kix_pp8e5zvimfw6-4,lower-latin) ". "}ul.lst-kix_e6e3f1leki8h-8{list-style-type:none}ul.lst-kix_az8etb2koj6-0{list-style-type:none}ul.lst-kix_az8etb2koj6-2{list-style-type:none}ul.lst-kix_az8etb2koj6-1{list-style-type:none}.lst-kix_pp8e5zvimfw6-5 > li:before{content:"" counter(lst-ctn-kix_pp8e5zvimfw6-5,lower-roman) ". "}.lst-kix_49v901ur12k5-0 > li:before{content:"" counter(lst-ctn-kix_49v901ur12k5-0,decimal) ". "}.lst-kix_49v901ur12k5-2 > li:before{content:"" counter(lst-ctn-kix_49v901ur12k5-2,lower-roman) ". "}.lst-kix_49v901ur12k5-1 > li:before{content:"" counter(lst-ctn-kix_49v901ur12k5-1,lower-latin) ". "}.lst-kix_49v901ur12k5-3 > li:before{content:"" counter(lst-ctn-kix_49v901ur12k5-3,decimal) ". "}.lst-kix_pp8e5zvimfw6-2 > li:before{content:"" counter(lst-ctn-kix_pp8e5zvimfw6-2,lower-roman) ". "}.lst-kix_pp8e5zvimfw6-1 > li:before{content:"" counter(lst-ctn-kix_pp8e5zvimfw6-1,lower-latin) ". "}.lst-kix_az8etb2koj6-2 > li:before{content:"- "}.lst-kix_az8etb2koj6-4 > li:before{content:"- "}.lst-kix_pp8e5zvimfw6-0 > li{counter-increment:lst-ctn-kix_pp8e5zvimfw6-0}.lst-kix_f7gbgn2oh70i-7 > li:before{content:"- "}.lst-kix_zbh5getctwro-0 > li:before{content:"- "}.lst-kix_az8etb2koj6-0 > li:before{content:"- "}.lst-kix_az8etb2koj6-8 > li:before{content:"- "}.lst-kix_8a9tj25fjntb-2 > li:before{content:"- "}.lst-kix_f7gbgn2oh70i-5 > li:before{content:"- "}.lst-kix_8a9tj25fjntb-4 > li:before{content:"- "}.lst-kix_t6sx197asdbh-0 > li:before{content:"- "}.lst-kix_pp8e5zvimfw6-1 > li{counter-increment:lst-ctn-kix_pp8e5zvimfw6-1}.lst-kix_8a9tj25fjntb-8 > li:before{content:"- "}.lst-kix_t6sx197asdbh-2 > li:before{content:"- "}.lst-kix_t6sx197asdbh-4 > li:before{content:"- "}.lst-kix_8a9tj25fjntb-6 > li:before{content:"- "}.lst-kix_ue8iqyatvq0b-6 > li:before{content:"- "}ol.lst-kix_49v901ur12k5-7.start{counter-reset:lst-ctn-kix_49v901ur12k5-7 0}.lst-kix_ue8iqyatvq0b-4 > li:before{content:"- "}.lst-kix_pp8e5zvimfw6-2 > li{counter-increment:lst-ctn-kix_pp8e5zvimfw6-2}ol.lst-kix_pp8e5zvimfw6-6.start{counter-reset:lst-ctn-kix_pp8e5zvimfw6-6 0}.lst-kix_49v901ur12k5-6 > li{counter-increment:lst-ctn-kix_49v901ur12k5-6}.lst-kix_ue8iqyatvq0b-0 > li:before{content:"- "}ol.lst-kix_pp8e5zvimfw6-7.start{counter-reset:lst-ctn-kix_pp8e5zvimfw6-7 0}.lst-kix_ue8iqyatvq0b-2 > li:before{content:"- "}.lst-kix_e6e3f1leki8h-0 > li:before{content:"- "}.lst-kix_xc6nxzfx4xy9-8 > li:before{content:"- "}ol.lst-kix_49v901ur12k5-8.start{counter-reset:lst-ctn-kix_49v901ur12k5-8 0}.lst-kix_e6e3f1leki8h-2 > li:before{content:"- "}.lst-kix_e6e3f1leki8h-4 > li:before{content:"- "}.lst-kix_49v901ur12k5-1 > li{counter-increment:lst-ctn-kix_49v901ur12k5-1}.lst-kix_e6e3f1leki8h-6 > li:before{content:"- "}.lst-kix_t6sx197asdbh-6 > li:before{content:"- "}.lst-kix_t6sx197asdbh-8 > li:before{content:"- "}ol.lst-kix_pp8e5zvimfw6-8.start{counter-reset:lst-ctn-kix_pp8e5zvimfw6-8 0}.lst-kix_zbh5getctwro-8 > li:before{content:"- "}.lst-kix_49v901ur12k5-7 > li{counter-increment:lst-ctn-kix_49v901ur12k5-7}ul.lst-kix_774guo83owgj-8{list-style-type:none}.lst-kix_yf73jkxdk0po-7 > li:before{content:"- "}.lst-kix_zbh5getctwro-4 > li:before{content:"- "}ul.lst-kix_774guo83owgj-6{list-style-type:none}ul.lst-kix_774guo83owgj-7{list-style-type:none}.lst-kix_5ye26eple4ct-0 > li:before{content:"- "}.lst-kix_zbh5getctwro-2 > li:before{content:"- "}.lst-kix_zbh5getctwro-6 > li:before{content:"- "}ul.lst-kix_774guo83owgj-0{list-style-type:none}ul.lst-kix_774guo83owgj-1{list-style-type:none}.lst-kix_az8etb2koj6-6 > li:before{content:"- "}ul.lst-kix_774guo83owgj-4{list-style-type:none}ul.lst-kix_774guo83owgj-5{list-style-type:none}ul.lst-kix_774guo83owgj-2{list-style-type:none}ul.lst-kix_774guo83owgj-3{list-style-type:none}

Microeconomic Way of ThinkingWe also discuss several other topics like What is Edman Degradation?

Cost - Benefits way of thinking

  • Result of getting or leasing through a trade / exchange
  • Individuals seeking to make themselves better off
  • People are pleasure seekers
  • Decisions made in own best interest
  • Microeconomics: process of thinking in order to make individuals or consumers better off
  • Optimal decisions
  • Consumers demand curve (multiply to make market demand)
  • Where law of demand comes from → individuals

Example: How many apples to buy from a producer store?

  • Optimal quantity?
  1. Start off at q = 0 (zero apples in bag)
  2. Consider q = 1 → q = +1 (marginal incremental change)
  • What is received in benefits and what is the cost from 0 → 1
  1. Evaluate the benefits - how much better off?
  • Result of marginal change - use monetary measure

MB = Marginal BenefitsDon't forget about the age old question of gvsu sws

MB(1) = +$10 ($10 better off / value of benefits)

MC = marginal cost

MC(1) = + $2

  • Gaining $10 at the cost of paying $2 → net price $8
  1. Increasing increment of apples

q = 1 → q = 2                q = +1Don't forget about the age old question of What is chemical kinetics?
Don't forget about the age old question of What refers to opposing pressures from different sources, occurring on the level of psychological conflict between individuals or groups?
If you want to learn more check out What does apical meristem mean?

MB(2) = $8

MC(2) = $2 → q = 2

  1. Q = 2 → q = 3        MB(3) = $6

                        MC(3) = $2We also discuss several other topics like .comsmn

  • Every time you make an incremental decision. The answer to whether to increase quantity depends on the benefits of cost
  • Benefits you more to increase quantity of apples
  • Marginal benefits need to be larger than marginal cost in order to increase quantity and be made better off

Rule of Rational life:

  • “Continue to pursue an activity (example: put more apples in bag) as long as marginal benefit outweighs marginal cost

        MB > MC

  • Stop when they’re equal

Cor. of RRL: q* = optimal quantity

        MB(q* = MC(q*)

  • Rule of rational life = rule of economics

Notation:

  • “Q” = individuals decision

(lower case is used for individuals to constraint small - scale demand curve) - q,d

  • Market = bunch of individuals put together based on individual decisions (Q,D,etc)

Law of Diminishing Returns → downward sloping marginal benefits curve

  • The value of 1 apple is greater than 5 apples
  • The more you consume, the higher the costs

Continuous decision making process

Discrete choice - yes or no, you do or don’t

  • Use Cost - Benefit Analysis

Example: Decision to go to college

Rational decisions can be made about discrete decisions

Theory of the Consumer:

  1. Use the rule of rational life → q*
  2. P → MC ( at different prices, what is q*?)

        d

  1. Aggregate d → D (market demand)

Theory of Consumer can’t

Benefits - side of consumption

  • Measurement of satisfaction of consumer - happiness
  • How to measure the unmeasurable?

Satisfaction → “willing to pay”

  • Asking consumer how much they are willing to pay in order to gain satisfaction

(measuring indirectly rather than directly)

Utility function: u = f(q) (amount of quantity gained)

As quantity goes up, the value of the good goes down

Marginal utility: extra satisfaction arising from change in consumption

Law of diminishing return = law of diminishing marginal utility

MIU is equal to price of good

Cost - side of consumption

  • Law of supply and demand gives us the cost total expenditure (TE) = P x q = 2q

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