The paper "Difference between Diminishing Marginal Returns and Decreasing Returns to Scale" is an outstanding example of a micro and macroeconomic assignment. According to the law of diminishing returns, as the amount of one variable input increases, other inputs remaining fixed, marginal product, that is, the output increase per unit of input increase diminishes. This happens only in the short run. On the other hand, the decreasing returns to scale are the situation in the long run when, with an additional increase in inputs, output increases by less than the increase in the inputs. The following chart shows the change in output, Q, as input (L) is increased gradually by one unit. From the above chart, the marginal product curve may be drawn as follows. As seen from the above diagram, as labor increases up to the 3rd unit, the marginal product increases and thereafter, the marginal product diminish with an increase in labor, other inputs remaining constant. The following diagram shows decreasing returns to scale through isoquants, that is combinations of the two variables of production, labor and capital, that produce the same output.
As both labor and capital increases by one unit, output increases by less than one unit. Conversely, an output increase by one unit would require more than one unit increase of either or both labor and capital as both labor and capital increases. This is shown in the following diagram. Question 2: Effect of price and non-price effect on the demand curve The demand function may be written as Qd = f (p) when income and tastes are constant. As price falls from 10 to 5, the consumer moves along the demand D1 so that quantity demanded increases from 10 to 20.
When income increases, the demand curve shifts to D2 so that even with the price remaining the same, output demanded increases to 30. Price and non-price effect on the supply curve The supply function is given by Qs = f (p). With the same technology that keeps the costs of production constant, the firm supplies higher amounts of output as price increases. If the price rises from 1 to 2, the quantity supplied increases from 5 to 10 as the firm moves along the supply curve S1.
But, if the costs of production fall, even at the same price level of 1, the firm may supply 15 units as the supply curve shifts to S2.