Laws of Returns Assignment help




There are three laws of returns known to economists:-->

  • Law of diminishing returns
  • Law of Increasing Returns
  • Law of constant returns.

Law of diminishing returns:-

In economics, diminishing returns (also called diminishing marginal returns) refers to how the marginal production of a factor of production starts to progressively decrease as the factor is increased. According to this relationship, in a production system with fixed and variable inputs (say factory size and labor), each additional unit of the variable input (i.e., man-hours) yields smaller and smaller increases in outputs, also reducing each worker's mean productivity. Consequently, producing one more unit of output will cost increasingly more (owing to the major amount of variable inputs being used, to little effect). This concept is also known as the law of diminishing marginal returns or the law of increasing relative cost.

Law of Increasing Returns:--

In economics and business, a network effect (also called network externality or demand-side economies of scale) is the effect that one user of a good or service has on the value of that product to other people. When network effect is present, the value of a product or service increases as more people use it. The classic example is the telephone. The more people own telephones, the more valuable the telephone is to each owner. This creates a positive externality because a user may purchase their phone without intending to create value for other users, but does so in any case. Online social networks work in the same way, with sites like Twitter and Facebook being more useful the more users join. The expression "network effect" is applied most commonly to positive network externalities as in the case of the telephone. Negative network externalities can also occur, where more users make a product less valuable, but are more commonly referred to as "congestion" (as in traffic congestion or network congestion). Over time, positive network effects can create a bandwagon effect as the network becomes more valuable and more people join, in a positive feedback loop.

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Law of constant returns:--

Laws of returns can also be stated in terms of cost. In this case they are called Laws of Costs. The Law of Costs and the Law of Returns are two perspectives of an increase or decrease in returns. If the cost of operating in an industry is decreased then the business will see proportionately more revenue from that industry with a smaller investment.

This tendency in economics is described as:

  • Law of increasing costs
  • Law of constant costs
  • Law of decreasing costs

Law of increasing costs

In economics, the law of increasing costs is a principle that states that once all factors of production (land, labor, capital) are at maximum output and efficiency, producing more will cost more than average. As production increases, the opportunity cost does as well. The law also applies to switching production in a maxed out economy. Essentially, the economy is still producing more, so the law still applies. The only difference is that resources are being taken from one area and applied to another, instead of simply producing more of the same


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