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The law of diminishing returns is a fundamental principle of both micro and macro economics and it plays a central role in production theory. [ 5 ] The concept of diminishing returns can be explained by considering other theories such as the concept of exponential growth . [ 6 ]
The law of diminishing returns states that if you add more units to one of the factors of production and keep the rest constant, the quantity or output created by the extra units will eventually get smaller to a point where overall output will not rise ("diminishing returns"). For example, consider a simple farm that has two inputs: labor and land.
For example, if both capital and labor inputs are doubled, output of the commodities is doubled. In other terms the production function of both commodities is "homogeneous of degree 1". The assumption of constant returns to scale CRS is useful because it exhibits a diminishing returns in a factor.
For example, Alexander Gerschenkron states that governments can substitute for missing prerequisites to trigger catch-up growth. A hypothesis by economic historians Kenneth Sokoloff and Stanley Engerman suggested that factor endowments are a central determinant of structural inequality that impedes institutional development in some countries.
When there are two machines, twenty eight furnitures are built. However, as the number of machines available increase, the change in the output turns out to be less significant compared to the previous number. That fact can be observed in the marginal product which begins to decrease: diminishing marginal returns. This is justified by the fact ...
In 1987 Solow was awarded the Nobel Prize in Economics for his work. Today, economists use Solow's sources-of-growth accounting to estimate the separate effects on economic growth of technological change, capital, and labor. [7] The Solow model is also one of the most widely used models in economics to explain economic growth. [8]
For example, in public finance the Robinson Crusoe economy is used to study the various types of public goods and certain aspects of collective benefits. [2] It is used in growth economics to develop growth models for underdeveloped or developing countries to embark upon a steady growth path using techniques of savings and investment.
The earlier term for the discipline was "political economy", but since the late 19th century, it has commonly been called "economics". [22] The term is ultimately derived from Ancient Greek οἰκονομία (oikonomia) which is a term for the "way (nomos) to run a household (oikos)", or in other words the know-how of an οἰκονομικός (oikonomikos), or "household or homestead manager".