The paper "Diminishing Returns, Return to Scale and Perfect Competition" is a good example of a macro and microeconomic essay. From the graph, Pb = Price buyers pay; Pm = Market price without the taxes = Ps = Price sellers receive. The area of the red rectangle in the graph is equal to the amount the government receives as tax revenue. Whereas the area of the triangle is equal to the loss of economic welfare that results due to taxation also referred to as the deadweight loss. The loss of economic welfare consists of the buyers that will be not buying the product since the price is higher than what they are willing to pay and therefore they resort to going without.
On the seller’ s side, some sellers will not produce the product since they are not receiving a price that is high enough to cover the economic cost they incur. From the two situations, the benefit that both the buyer and the seller would have contributed to the society and the economy, in general, is the deadweight loss and is as a result of the tax imposed by the government.
The buyers contribute to part of the tax from an economic point of view through the reduced consumer surplus that amounts to the difference between the price of the product and their willingness to pay. Sellers on the other hand contribute to part of the tax by the reduction in producer surplus. The loss goes to the government in form of taxes. Diminishing returns, Return to Scale and Perfect competition Diminishing return- Diminishing returns refer to the decrease marginal output in the process of production when a single factor of production added whereas all the other factors of production remain constant.
This is at times referred to as the law of diminishing marginal returns. Return to Scale – return to scale refers to what happens as the factors of production are increased in the long run. The return to scale can occur in 3 ways. There can be a constant return to scale where the number of output increases in the same proportion as the number of inputs change.
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Francois, J. & Wooton, I., 2007. Market Structure And Market Access. Washington: The World Bank.
Frank, R. H. & Bernanke, B., 2004. Principles of Economics. Boston: McGraw-Hill.