Download law of diminishing returns


Understanding Basic Economic
Principles
Reminder: student learning activities are at the end of this
power point.
Common Core/Next Generation Standards Addressed!
RST.6‐8.2 - Determine the central ideas or conclusions of a text; provide an
accurate summary of the text distinct from prior knowledge or opinions.
(MS‐LS1‐6)
RI.8.8 - Trace and evaluate the argument and specific claims in a text,
assessing whether the reasoning is sound and the evidence is relevant and
sufficient to support the claims. (MS‐LS2‐4)
WHST.6‐8.2 - Write informative/explanatory texts to examine a topic and
convey ideas, concepts, and information through the selection, organization,
and analysis of relevant content. (MS‐LS1‐6)
Career Cluster Standards – Agriculture, Food and Natural
Resources.
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Pathway Content Standard: The student will demonstrate
competence in the application of principles and techniques for the
development and management of agribusiness systems.
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ABS.01. Performance Element: Utilize economic principles to
establish and manage an AFNR enterprise.
ABS.01.01. Performance Indicator: Apply principles of capitalism in
the business environment.
ABS.01.01.01.a. Recognize principles of capitalism as
related to AFNR businesses.
Bell Work
 How
much money do you spend
in a week?
 How do you decide what
purchases to make?
 How can you save more?
STUDENT LEARNING
OBJECTIVES
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Understand the resources needed for
agricultural businesses.
Understand the Law of Supply.
Understand the Law of Demand.
Understand the relationship between supply and
demand.
Understand the Law of Diminishing Returns
Understand the Principle Equimarginal Returns.
Understand the relationship between
enterprises.
Terms
 Capital
 Competitive
enterprises
 Complementary enterprises
 Equilibrium
 Law of diminishing returns
Terms Continued
 Labor
 Land
 Law
of Demand
 Law of Supply
 Management
Terms Continued
 Marginal
cost
 Marginal return
 Principle of Equimarginal Returns
 Resource
 Supplementary enterprises
Resource is an item used to produce
a product or service.
 Land
 Capital
 Labor
 Management
Land includes everything in nature
used in production.
 Soil
 Minerals
 Wildlife
Capital includes things used in
production that are man-made.
 Cash
 Equipment
 Buildings
 Supplies
Labor is the physical energy
supplied by humans.
Management is the decision making
function of the business.
Law of Supply
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The Law of Supply states that when
the price of a product is lowered, with
no change in other factors, less of the
product will be supplied.
Factors Affecting the Supply
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Technology affects supply.
 Generally, technology decreases the
cost of production, making it cheaper to
produce the product.
 The rate that technology advances is
not constant.
Factors Affecting the Supply
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Costs of production affects supply.
 When prices of inputs change, the level
of production often changes.
 Generally, producers try to sell products
for at least as much as the total cost of
all the inputs.
Factors Affecting the Supply
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Price of other products affects supply.
 If a firm can produce a different product
that is priced higher, it may change
production to capitalize on higher
profits.
 Sometimes it is unfeasible to shift fixed
assets to produce different products, i.e.
removing an orchard to take advantage
of higher corn prices.
Factors Affecting the Supply
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Seasonal and cyclical production affects
supply.
 Some cycles of production are
uncontrollable, i.e. time required for
livestock to reproduce, time needed for
plants to bear fruit.
 Certain fruits and vegetables are
considerably cheaper when “in-season”.
Law of Demand
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The Law of Demand states that
when the price of a product is
increased with no change in other
factors, less product will be
purchased.
Factors Affecting Demand
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Size of population affects demand.
 With higher population more
product will be needed.
 All other things constant, demand is
increased as population increases.
Factors Affecting Demand
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Tastes and preferences of consumers
affects demand.
 Tastes and preferences change
with time and other factors.
 Weather affects preferences, (i.e.
coats in the winter, barbecue foods
in the summer).
Factors Affecting Demand
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Income and distribution of wealth
affects demand.
 Generally, higher income results in
more products being purchased.
 More luxury items are purchased as
incomes increase.
Factors Affecting Demand
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Relative prices of all goods and services affect
demand.
 With a limited budget, decisions to buy an
item directly affects the amount of another
item that can be purchased.
 When the price of a substitute item
decreases, consumers will purchase more of
the substitute.
 When the price of a complement (items used
together) decreases, more of the item will be
purchased.
Relationship between Supply and
Demand
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Interaction of supply and demand
determines price.
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Price is found at equilibrium, where the
supply and demand curves intersect.
If demand curve shifts right, the price
increases.
If supply curve shifts left, the price increases.
Foreign trade is a major player in price
determination of agricultural commodities.
Principle of Diminishing Returns
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Law of Diminishing Returns affects physical
output and economic returns.
The law of diminishing returns states that as a
variable resource is added to fixed resources,
marginal output declines immediately or after an
initial stage of increasing marginal returns. Total
output may increase at an increasing rate for a
time, but then increases at a decreasing rate
until it reaches its maximum.
Principle of Diminishing Returns
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Values need to be provided to understand
the law of diminishing economic returns.
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The additional cost of each unit of input is
called marginal cost.
The additional return resulting from each unit
of input is called marginal returns.
Net returns will be highest when marginal cost
is equal to marginal return.
Principle of Equimarginal Returns
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The Principle of Equimarginal Returns states
that to allocate a resource among several
alternative uses in such a way that the marginal
returns are equal in all uses.
 Never invest capital in an alternative that
does not provide returns equal to or greater
than the amount invested.
 Always invest capital in the option that
provides the greatest marginal returns, so
long as the returns are greater than the
amount invested.
Relationship between Enterprises
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Many businesses combine several
enterprises to maximize profits.
Supplementary enterprises are those
where one enterprise supplements the
income of another.
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A sports stadium is often used for concerts.
A lawn tractor can be used to move snow.
Relationship between Enterprises
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Complementary enterprises are those
where one enterprise produces the inputs
for another.
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Soybeans used in rotation to leave nitrogen for
corn.
Tree trimming service may sell mulch.
Relationship between Enterprises
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Competitive enterprises are those where
one enterprise interferes with another.
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Enterprises competing for labor resources.
Students who work so much that they do not
have enough time to study.
Review/Summary
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What resources are needed for a
agricultural businesses?
Define the Law of Supply and Demand.
What is the relationship between supply
and demand?
Explain the Law of Diminishing Returns.
Explain the principle Equimarginal
Returns.
Identify the relationship between
enterprises.
The End!
Student Learning Activities
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Sample tests are available in the Lesson
Plan tab.
Name: ____________________________
KEY
KEY
KEY
Jeopardy
Understanding basic economic
principles
The curve
The law of
diminishing
returns
Enterprises
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Resources needed
for agriculture
business
Supply and
demand
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Question 1-10
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What is a resource?
Answer 1-10
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“Resource is an item used to produce
a product or service.”
Question 1-20
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Name the four resources given in the
power point?
Answer 1-20
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Land
Capital
Labor
Management
Question 1-30
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What is included in land?
Answer 1-30
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Land includes everything in nature
used in production.
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Soil
Minerals
Wildlife
Question 1-40
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What is included in capital?
Answer 1-40
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Capital includes things used in
production that are man-made.
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Cash
Equipment
Buildings
Supplies
Question 1-50
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What is labor?
Answer 1-50
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Labor is the physical energy suppled
by humans.
Question 2-10
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What is the law of supply?
Answer 2-10
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The law of supply states that when the
price of product is lowered, with no
change in other factors, less of the
product will be supplied.
Question 2-20
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What is the law of demand?
Answer 2-20
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The law of Demand states that when
the price of product is increased with
no change in other factors, less
product will be purchased.
Question 2-30
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Name two of the four factors that effect
supply.
Answer 2-30
1.
2.
3.
4.
Technology
Cost of production
Price of other products
Seasonal and cyclical production
Question 2-40
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Name two of the factors that effect
demand.
Answer 2-40
1.
2.
3.
4.
Size of population
Tastes and preference of consumers
Income and distribution of wealth
Relative prices of all goods and
services
Question 2-50
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What is equilibrium?
Answer 2-50
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Price is found at equilibrium, where the
supply and demand curves intersect.
Question 3-10
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What is the supply and demand carve
used to find?
Answer 3-10
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The supply and demand curve is used
to find equilibrium.
Question 3-20
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Who controls the supply and demand
curve?
Answer 3-20
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Consumers control the supply and
demand carve.
Question 3-30
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What happens when the supply curve
shifts left?
Answer 3-30
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When the supply curve shits left, the
price increases.
Question 3-40
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What happens when the demand curve
shifts left?
Answer 3-40
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When the demand curve shirts right,
the price increases.
Question 3-50
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What happens when the demand cure
shifts left?
Answer 3-50
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When the demand curve shifts left, the
price decreases.
Question 4-10
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What dose the Law of Diminishing Returns
affect?
Answer 4-10
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The Law of Diminishing Returns
affects physical output and economic
returns.
Question 4-20
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“ ___________ need to be provided to
understand the Law of Diminishing
Economic Returns.”
Answer 4-20
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“Values need to be provided to
understand the law of diminishing
economic returns.”
Question 4-30
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The additional cost of each unit of input is
called?
Answer 4-30
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The additional cost of each unit of
input is called marginal cost.
Question 4-40
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The additional return resulting from each
unit of input is called?
Answer 4-40
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The additional return resulting from
each unit of input is called marginal
returns.
Question 4-50
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__________ _____________ will be
highest when marginal cost is equal to
marginal return.
Answer 4-50
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Net returns will be highest when
marginal cost is equal to marginal
return.
Question 5-10
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__________ ___________ are those
where one enterprise produces the inputs
for another.
Answer 5-10
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Complementary enterprises are those
where one enterprise produces the
inputs for another.
Question 5-20
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_____________ ________________ are
those where one enterprise supplements
the income of another.
Answer 5-20
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Supplementary enterprises are those
where one enterprise supplements the
income of another.
Question 5-30
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Many businesses combine several
enterprises to do what?
Answer 5-30

Many businesses combine several
enterprises to maximize profits.
Question 5-40
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When should you invest capital?
Answer 5-40
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Always invest capital in the option that
provides the greatest marginal returns,
so long as they returns are greater
than the amount invested.
Question 5-50

The principle of Equimarginal Returns
states that…
Answer 5-50

The principle of Equimarginal Returns
states that to allocate a resource
among several alternative used in
such a way that the marginal returns
are equal in all uses.