Question

Using an example for each, explain the following:

a) Total Cost

b) The Law of Diminishing Returns

c) Economies of scale

d) Inelastic demand

e) The Multiplier

f) The Consumption Function

Answer 1

A) *Total Cost* is the total of fixed cost and variable cost example the overall cost incurred to make a product. If a car company is getting started, it has an initial fixed cost requirements like land, infrastructure, capital and variable cost like labour, raw materials it varies with production thus combining both results total cost.

B) *Law of diminishing returns* It has 3 stages of production, stage one- increasing returns to factor where the maximum average product is utilised as every additional unit of labour employed results in trade in average productivity.
Stage 2 is the Diminishing returns to factor where both the average and marginal product decline though positively and
Stage 3 begins from maximum total product as beyond this point total product declines and marginal product becomes negative. Example a automobile company production increases the variable factors and production still doesn't increase the marginal product,or in other words the output is stagnant and declining shows diminishing returns to scale.

C) *Economies of scale* it refers to the increase in saving of cost by increasing the level of output produced. Example the initial cost in establishing a firm like the water network set by a nation to make available of water facility to the people. The initial cost is expensive but over the long run it gets reduced as output is increasing trend.

D) *Inelastic demand* when the percentage change in quantity demanded for a commodity is less than its percentage change in price. Example: Incase of necessities like food, fuel, inevitable items cannot be compromised even if there is change in price. Like a price hike in rice may still force us to depend on it as it's a basic necessity .

E) Multiplier is the relationship between final change in income by the initial change, the higher the marginal propensity to consume higher is the multiplier value, a company building a project employs all to increase the productivity is the concept. The economy tries to increase expenditure to improve the output like the gross domestic product, like a corporation tries to build a factory where workers and suppliers are directly and indirectly employed.

F) *Consumption function* introduced by keynes establish the law as there is a proportional increase in consumption when income increases example the case of shifting to purchase luxury goods from necessities as a result of increase in income. Consumption is the function of income. When an individual salary increases he tends to buy the next level of good that belong to luxury goods which was not purchased earlier due to low income.