31-07-2012, 11:01 AM
MANAGERIAL ECONOMICS
Law of Diminishing Returns.eco.docx (Size: 31.67 KB / Downloads: 47)
What is the law of diminishing returns? Why this proposition is called a “law”?
It states that, at some point- when we add more variable input to a fixed input-our marginal product will start to decrease as the newly added variable input is being added to an already increasingly scares input. This can be explained by citing an example, if we add more workers to a job, such as assembling a car. At some point, adding more workers would cause problems, as they would be getting in each other's way, or workers wold often find themselves waiting for access to specific part or tool required for the job.This proposition is called a law because it is standardized and applicable on all the production processes. Any manufacturing and production company can use this proposition (or Law) to their betterment.
Is Tony right in his analysis of the situation? Explain.
According to my point of view, Tony’s decision of increasing the price a good decision as Pizza is a product that represents a small portion of an individual’s income so an increase or decrease in the price would not affect the demand drastically as the demand for such products remain in-elastic. In this case he can afford to increase the price of his pizza as it I one of the Best pizzas in town so his customers would not mind a slight increase in the price as it would still be affordable for them. Secondly Tony’s pizza being the best, his customers would not leave it for a substitute because of a slight prize change and they would still buy it and his Total revenues will not decrease.