Economy Test

Discussion in 'Business & Economics' started by TruthSeeker, Jun 8, 2004.

  1. TruthSeeker Fancy Virtual Reality Monkey Valued Senior Member

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    I have an economy test tomorrow. I still don't quite understand very well diminishing returns. I think it is because of all the curves... it's kinda confusing.... :bugeye: Monopoly, oligopoly and all that stuff is easier tough. I think it is just all the cost curves that are kinda confusing. Anyone knows an easy way to understand them?

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    I have a math test too. Gee... I really need a break...!

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  3. Slaughterist Mayhem Activist Registered Senior Member

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    To understand diminishing marginal returns it is best to consider a concrete example.
    First, think of when you are outside on a hot day. You get really thirsty and want a glass of water. When you come inside you get a glass of ice water and drink it. That first glass is just awesome and refreshing. Then you drink another glass of water. It is pretty good, but not as good as the first one. If you drink a third glass it probably is not that good since you are already pretty full of water. A fourth glass would make you feel sick if you could drink it. This is the concept of diminishing marginal returns. The marginal return is the benefit or utility you get from drinking one extra glass of water. In this case each successive glass of water is less refreshing than the previous one. The marginal returns are diminishing with each glass.

    This next example is a little more complex.
    Consider a small factory that you own, which manufactures telephones. First you have one employee working to make phones. He can make 10 phones a day. Now you hire another employee. The two can specialize and are even more productive than when alone. One worker solders electronics while the other assembles the pieces. Now you can make 30 phones a day. This is the area of INCREASING marginal returns. The additional benefit of adding one more worker is more than the benefit of the one before him.

    Now we add a third worker to the factory. You assign two workers to solder the electronics. However, you only have one set of soldering tools at the factory. The 2 solderers have to share them so they are not as productive. You can now make 40 phones a day. This is diminishing marginal returns. The 2nd worker added 20 units of production while the 3rd worker added only 10 units of production.

    Add a 4th worker to assemble the phones, but you have limited assembly tools. You only make 45 phones a day, this worker adds only 5 phones of production. Plus, your workers are getting a little crowded at the work bench.

    Add 5 more workers. Now you make only 40 phones. These workers caused a NEGATIVE MARGINAL RETURN. Your factory is so crowded that the workers can barely move around as they argue and fight with eachother.

    As you can see from this example, at a certain point when you keep increasing the factors of production(workers) each successive worker adds less production than the worker before him. Eventually this amount of production becomes negative.
     
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  5. 15ofthe19 35 year old virgin Registered Senior Member

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    Excellent examples. Basically you are trying to grasp the notion of cost/benefit which is 90% of what you need to pass most basic Econ courses. When you buy something to improve something you must ensure that the cost is not greater than the benefit. If you buy a billboard to advertise your biz and it costs you $1,000 per month and it brings in $1,500 in additional biz, you are doing well. However if you buy a second billboard for another $1,000 per month and it only brings in an additional $100 of biz, you're overextended and hence, wasting money.
     
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  7. Fraggle Rocker Staff Member

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    We have a classic saying in IT that sums this up neatly: "Adding more people to a project that is behind schedule only makes it later."
     
  8. TruthSeeker Fancy Virtual Reality Monkey Valued Senior Member

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    Thanks guys, that is really helpful. I hope I remember how to explain it. Slaughterist, it is funny that you talked about utility, cause after beginning to read what you wrote, the first thing that came to my mind was marginal utility. I haven't made that connection before...

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  9. vodooeconomist Registered Member

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    Excellent description of the marginal product of labor and diminishing returns. Now I'd be really impressed if you can describe Keynesian equilibrium/fiscal policy.
     

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