Economics

Explain the law of diminishing returns.

The law of diminishing returns is an economic law which states that if one input
in the production of a product is increased while other inputs are constant, there comes a
point where it will become less productive and will eventually decrease the output per
unit of the variable factor. Example is a farmer with a fixed expanse of land. The farmer
can increase the number of workers and the amount of crops harvested will also
increase. But, there will be a point where the harvested crops per worker will start to
decrease. Since the land is fixed, its yield is also fixed but the workers are increased so
the lands yield will be spread thin over the workers and their productivity will also
decrease.

Differentiate Production from Productivity.

Production is the process of combining units of input to create output which
satisfy human needs and wants. It is the act of manufacturing goods for their use or sale.
Whereas productivity is the rate at which goods are produced. Productivity is the ratio of
the output to input in production. Production is the amount of manufactured goods while
productivity is the efficiency of the production concerning with the amount of output
with regards to the input.

One important measurement of productivity is based on the value-added concept. Give

the significance of this concept and its practical use to a business.
The value-added concept is a measurement tool which measures the output of an
organization which includes the sales and the change in inventory of work-in-progress
and finished goods but excludes intermediate inputs which are purchases from outside
the organization (e.g. materials, energy and services used up in the process of
production). The value added of the company is the wealth created by the products
and/or services generated by an organization through the collective effort of those who
work in the organization and those who provide the capital. The value-added concept
can be used to estimate labor productivity growth and multifactor productivity (MFP)
growth. For example, multifactor measures can take the form of capital-labor MFP based
on a value-added concept of output. The output measure is related to capital and labor as
inputs excluding the intermediate inputs. Through this concept, the management can
pinpoint the areas of the organization which are productive and improve those that are
less productive.

Differentiate incremental costs from opportunity cost?

Incremental cost is the change in cost caused by a given managerial decision and
often involves multiple units of output. It is an increase or decrease in costs as a result of
one more or one less unit of output. Incremental costs are a prime determinant of profit

contribution, or profit before fixed charges. On the other hand, opportunity cost is the
foregone value associated with the current rather than next-best use of an asset.
5

Define Profit and economics.

In accounting, profit is the difference between the revenue of a company and the
explicit costs of the business. In economics, profit is smaller than the accounting profit
because it reflects the total opportunity cost (both explicit and implicit). In classical
economics and Marxian economics, profit is the return to an owner of capital goods or
natural resources in any productive pursuit involving labor, or a return on bonds and
money invested in capital market.
Economics is the branch of social science that deals with the production,
distribution and consumption of goods and services and their management. It is the
social science that studies how individuals, governments, firms and nations make
choices on allocating scarce resources to satisfy their unlimited wants and needs.
Economics can generally be broken down into macroeconomics and microeconomics.
The former concentrates on the behavior of the aggregate economy while the latter
focuses on individual consumers.