Question

Fully explain, identify, and/or discuss the relationship between each of the following pairs of terms:

A. Capital intensive and labor intensive

B. Economies of scale and the LRAC curve

C. Short run and long run

D. Negative marginal returns and total output

E. Law of Diminishing Returns

Answer 1

A ) Ans:

Capital intensive and labor intensive are two methods or technique of production. Capital intensive refers to the proportion of capital relative to labor whereas labor intensive refers to proportion of labor relative to capital. when more capital is used as compared to labor then that technique of production is know as capital intensive. when more labor is used as compared to capital  then that technique of production is know as labor intensive.

B ) Ans:

Generally the long run average cost ( LRAC ) curve is ' U ' shaped. The decreasing portion of LRAC curve shows economies of scale . It means cost of production decreases when the firm's output increases.The increasing portion of LRAC curve shows diseconomies of scale . It means cost of production increases  when the firm's output increases.

C ) Ans:

Short run is a period where one factor of production is variable , namely labor and other factors of production remain constant.

Long run is a period where all factors of production are variable .

D ) Ans:

When marginal product or marginal returns  increases at an increasing rate then the total output increases at an increasing rate.

When marginal product or marginal returns decreases then the total output increases at a decreasing rate.

When marginal product or marginal returns is negative then the total output starts decreasing.

Total output is maximum when the marginal product is zero.

E ) Ans:

Law of diminishing returns refers that when more variable factors are employed on a given fixed factor then the total output increases at an increasing rate and then increases at a decreasing rate. when output increases at a decreasing rate then that is called law of diminishing returns.