Law of Diminishing Marginal Return

Custom Student Mr. Teacher ENG 1001-04 30 December 2016

Law of Diminishing Marginal Return

The Law of Diminishing Marginal Return suggests the inverse relationship of marginal utility that a person derives from the quantity of his/her consumption of that given good or commodity. In other words, the higher the number of quantities one consume for a particular good/commodity, his/her marginal utility from consuming that given good decreases, and vice versa. For instance, a person derives 10, 14, 16 units of utility from consuming 1 unit, 2 units, and 3 units respectively of Pepsi Cola.

Given this, though the utility of the person is in increasing trend [10 to 16 utils], but the marginal utility exhibits a decreasing trend [4 to 2 additional utils] as the number of Pepsi Cola is consumed by the given individual. The Water-Diamond Paradox is considered a contradiction since, relatively, water is more essential to life compared to diamonds, yet, diamonds have higher price compared to water or the price of water is way cheaper compared to diamonds. In most cases, those things that have higher values are the ones with higher prices.

But for the Water-Diamond Paradox, water, which has higher value, has lower price compared to diamonds, thereby not conforming to the above stated idea. The difference between ATC and AVC, given that the number of outputs increases, is equal to zero since increase in the level of output do not directly affects TFC, which is the difference of ATC and AVC. Oftentimes, it is the AVC that is immediately affected for a given increase on the number of output or level of production of a given firm.

Economies of scale provide an illustration of the relationship of increase in the production efficiency and the production volume of a given firm. For instance, Pepsi Corporation purchased more equipment for its production line. The said purchase of new machineries improves the overall efficiency of Pepsi’s production line, which results to higher number of Pepsi Cola produced at a given period of time. On the other hand, Diseconomies of Scale provide an illustration of the relationship between the increase on the number of output produced and cost of production.

Meaning, as the number of output produced increases; the cost of production also increases. For instance, Toyota is already efficient with 100 workers. Aiming to further extend their profits, Toyota management hired new 20 workers, making their workforce equal to 120. Those additional workers will only increase the production cost of Toyota, while the volume of cars produced will still be almost the same or equal to the time when workforce of Toyota was still 100.

Fixed costs would be the computers, land, building that I will use for my internet business; while variable costs would be the electricity and labor cost. In order for my business to take advantage of economies of scale, I must increase the number of computers in the internet business in order for me to accommodate more customers. The event of increasing the number of computers will stop by the time the marginal profit starts to decline since my marginal cost become larger than my marginal revenue.

Generally, businesses shut their operations down if the difference between total revenue of producing equilibrium quantity of good/service is less than the total variable cost of producing equilibrium quantity of good/service. Or, the business must shut down if price of producing equilibrium number of products is less than the average variable cost. On the other hand, the business will continue to operate if the price level is greater to the average variable cost. Answer #7a

Sustainable development would be the economic principle which I think would determine how long firms producing ethanol from alcohol will survive can. Given the limited resources that we have today and the ever increasing consumption of every consumers, it is a must for ethanol producers the how status of sustainability of corn in the economy in order for them to have an idea the amount of corn that will be available in the next coming years [long run]. Cellulosic ethanol is a biofuel which can be produced through utilizing corn, starch, woodchips to name a few.

Given the rise of cellulosic ethanol in the market, the demand for corn in the market also increased, and so with its price (Cox 1). Therefore, in the long run, the rise of cellulosic ethanol will more likely to increase the cost of production of corn-based industry due to the price increase in corn caused by its high demand in the market.

Works Cited

Cox, Jeff. “Big Ethanol Shakeout Coming? ” 21 August 2007. CNNmoney. com. 19 July 2008 <http://money. cnn. com/2007/08/14/news/economy/biofuel_bigethanol/index. htm? postversion=2007082107>.


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  • University/College: University of Chicago

  • Type of paper: Thesis/Dissertation Chapter

  • Date: 30 December 2016

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