The concepts learned in this week were both challenging and fascinating. One of the concepts that I found rather interesting is the law of diminishing marginal productivity. According to this law, the additional of extra units of a variable such as labor to fixed inputs may increase the total marginal utility up to a certain level when the output becomes constant and further addition of the units leads to a reduction in the marginal productivity (Colander, 2010). This is interesting due to how the increase in marginal units of an input affects both the average fixed cost and total variable fixed cost in the short run. However, the law of diminishing marginal productivity is a bit harder to conceptualize since there are no specific levels that can hold to all economies such that increasing the input of an input between a certain levels will automatically lead to reduction in short-term profits. This concept is important as it informs economists to be conscious and allocate utter care and rationale in any activity aimed at increasing the marginal productivity. Additionally, I find it being important in the determination of work schedules in offices. It is also important to note that profits, revenues and costs are important concepts that a business should be conscious of since they are highly and closely related.
Profit = total revenue – total cost (P=TR-TC. But TC=FC+VC) (Colander, 2010).
Productivity and cost of production are directly related in the sense that if one wants to increase productivity, they must consider increasing the inputs such as land, capital and labor into the production process. It is therefore apparent that productivity cannot be increased if the input factors are held constant. Firms are interested in the lowest cost methods as that is only when they will be able to increase the profitability (Colander, 2010). I found it rather easy to conceptualize how an increase in production must be backed by an increase in input factors. Firms must strive to attain technical efficiency and economic efficiency. They should maintain a level of productivity that the business can effectively and efficiently meet while avoiding the diseconomies of large scale production. This can be done by use of modern efficient technologies that completely transforms the operations of the business.
Increase or decrease of factors of production be depends on elasticity of supply or demand in one side, and elasticity of production in the other side. When the supply of factors of production increases its price falls since supply will be surpassing supply while if it decreases its prices rises since the demand will be outstripping the supply (Colander, 2010). A state of equilibrium is attained when the quantity of factors supplied equals the quantity demanded and the price of the inputs this point is termed as equilibrium price. The law of demand and supply holds. I found the of Demand regression model to be very operational and efficient in analyzing the effect of price changes on price of inputs. This can be used by governments to control the levels of unemployment as well as in formulation of, efficient wages, comparable worth laws and living wage laws.
MR and MC affect the profit making potential of a firm. Firms always strive to minimize MC so as to minimize expenses and increase the profits. This can be used to explain why the profit –making potential of a firm. This concept is very informative in deciding the best business strategy. I find it to be of utter significance in estimation of MR and the profitability of a firm taking into account the present value (PV) of money.
Colander, D. C. (2010). Economics (8th ed.). New York, NY: McGraw-Hill.