Answer to Question #120673 in Economics of Enterprise for Emmanuel Amramah

Question

. An entrepreneur starts a small firm with one machine, and a small factory space and employs one person initially. With the aid of appropriate diagrams/table and theory, explain the process of production as he increases his output. Indicate clearly what law governs this process of production, the variable and the fixed factors used by this entrepreneur.

Answer 1

1) An entrepreneur starts a small firm with one machine, and a small factory space and employs one person initially.

I have explained this with the help of the diagram below where Price is taken on the vertical axis and Quantity is taken on the horizontal axis. When he increases his production output, at first the total product does on increasing at an increasing rate, then it increases at a diminishing rate, reaches a maximum and then it starts to fall. The marginal product also increases at first and begins fall and similarly the Average Products increases, reaches a maximum and then decreases.

The point where the marginal product increases is where the Total Product curve increases at an increasing rate and the point till the marginal product falls to zero before reaching negative is the point where the total product curve is maximum and then it starts to fall.

The law which governs this process of production is the law of diminishing marginal returns which states that, holding all other factors constant, during the production process as the producer goes on increasing more and more variable inputs given the fixed inputs, the output would at first increase but then a point would be reached where the output reaches a maximum and then starts to decrease with additional inputs.

A Increasing at an increasing rate.

B Increasing at a decreasing rate.

C Decreasing.