Question

1. An entrepreneur starts a small firm with one machine, and a small factory space and employs one person initially. With the aid of appropriate diagrams/table and theory, explain the process of production as he increases his output. Indicate clearly what law governs this process of production, the variable and the fixed factors used by this entrepreneur.

2. Discuss the effect of covid-19 on the level of unemployment in Ghana.

3. In March 2020 Ghana recorded its first case of Covid-19 and which subsequently led to a lock down in Kumasi and Accra. Using appropriate diagrams explain the effect of the covid-19 pandemic on equilibrium price and quantity of sanitizers on the market:

1. Before the lock down

b. After the lock down.

Answer 1

Q1. Before we proceed with the question, let’s understand few terms:

· Fixed Factors – Those factors that do not vary or change with a change in output. For Example. Land, Machines, factories, office buildings, capital equipment, etc.

· Variable Factors – Those factors which vary when the output changes. As production increases, more variable factors are employed; when production falls less of such factors are employed. For Example, Labor, raw material, electricity/energy, etc.

· Total Product – Total quantity of output produced by a firm (in short run) in relation to variable inputs such as labor.

· Average Product – Holding all other factors fixed, Average product is the Total quantity produced by a firm per unit of a variable factor such as Labor.

· Marginal Product – Holding all other factors fixed, Marginal product is the additional output produced by a firm, using one more unit of a variable factor like labor.

Given that an entrepreneur, starts a small firm with one machine, and a small factory space and one person initially. The process of production as he increases his output can be explained by the law of variable proportions.

According to the Law of Variable Proportions, as the quantity of one specific factor is increased holding all other factor of production constant/fixed, the marginal productivity of the variable factor will first increase, but will eventually decline. This law is based upon certain assumptions which are:

1. Technology is assumed to be fixed: The law of variable proportion studies the trend of change in out-put due to a change in a variable factor. If technology level improves, the total product will increase without any change in the variable input. Thus the law will not hold true.

2. Only a single factor at a time is assumed to be variable.

3. All variable factor units are homogeneous, which means they are of the same quality.

4. The law is based on the fact that all factor proportions are variable. If the factor inputs are employed in fixed proportions, then the law does not hold true.

5. The law works only in short run

In the given questions, the machine and the small factory space are fixed factors of productions (they don’t change over time) and the labor employed is the variable factor of production (increase over time to produce more output). The production process, initially with one labor unit can be explained with the help of the below table and diagram categorized into 3 stages of production.

· The Table shows the increasing units of labor, total product, average product and marginal product and the production stage in column 1, 2,3,4,5 respectively. Average product is given by dividing the total product with the receptive labor units in each cell. Marginal product is given by the change in total product or the difference in total product when one more unit of labor is employed. Say, as the entrepreneur increases labor from 1 to2 units the marginal product at 2 units if labor is 15 – 5 = 10 units.

· The diagram shows the output produced on the Y-axis and the variable input, labor in the X-axis. It shows the relations between TP, AP and MP curves as the production increases.

Labor Units	TP	AP	MP	Stage
1	5	5	5	Stage 1
2	15	7.5	10
3	35	11.7	20
4	50	12.5	15	Stage 2
5	57	11.4	7
6	59	9.8	2
7	54	7.7	-5	Stage 3
8	50	6.3	-4

Stage 1: In this stage, as the variable units increase from 1 units to units 3, the Marginal product increases, and the total product increases at an increasing rate. This stage is called as stage of increasing returns to factor. From the figure we can see, that as output increases, MP curve slopes upwards (marginal product increases) till point E where MP is maximum. Along with this total product also increases. Point A shown in the figure is known as the point of inflection. After Point A, the TP Curve changes its curvature and becomes comparatively flat. It is at point where MP and AP are equal and also the AP is at its maximum. This marks the end of Stage 1 of production.

Stage 2: In this stage when the marginal product starts declining, the total product still increases but at a decreasing rate. This stage is called as stage of decreasing or diminishing returns to factor. Here marginal product is continuously falling and total product increases but at a decreasing rate. The stage ends at point C, where MP = 0. Here the total product is maximum which can be seen from point D. Point C shows the end of stage 2.

Stage 3: Here, when marginal product becomes negative, the total product starts declining. This stage is called as negative returns to factor. This is shown after point C where MP equals to -5.

From the above analysis we can say, a rational producer will always operate in Stage 2, because its in stage to where the total product is maximum.

• In stage 3, the entrepreneur faces negative returns
• In stage 1, the fixed factors of production are not fully utilized, and as we saw that in stage 2 the TP was still increasing, so stopping till stage 1 will lead to a situation of underproduction.