| Line 36: |
Line 36: |
| | == Review: Returns to Scale == | | == Review: Returns to Scale == |
| | | | |
| − | Next let's review “returns to scale.” Imagine using a scale of one foot in measuring the dimensions of a room. Then change to a scale of inches. All dimensions increase by a factor of 12, because there are 12 inches to a foot. That is what “scale” means: it affects everything. In economics, changing the scale means changing all inputs by the same proportion. Increasing the scale means increasing all inputs. The “returns to scale” are then what happens to the output of a company when all inputs are increased. Is bigger better for the business? | + | Next let's review “returns to scale.” Imagine using a scale of one foot in measuring the dimensions of a room. Then change to a scale of inches. All dimensions increase by a factor of 12, because there are 12 inches to a foot. That is what “scale” means: it affects everything. In economics, changing the scale means changing all inputs by the same proportion. Increasing the scale means increasing all inputs. The “returns to scale” are then what happens to the output of a company when all inputs are increased. Is "bigger" better for the business? |
| | | | |
| − | The phrase that something is "scalable" means its proportions increase in a similar way in all respects, like "similar triangles" in geometry. Some things are "scalable", while others are not. A software database program that works the same for 100 entries as it does for 1 million entries is "scalable"; a program that needs to be reworked and reprogrammed as the database grows larger is not scalable. One the terrific features of "wiki" software used by Conservapedia is that it is scalable: almost no adjustments were needed as the number of its entries increase from 1 to 1000 to over 30,000 now, or even to a million entries in the future. | + | The phrase that something is "scalable" means its proportions increase in a similar way in all respects, like "similar triangles" in geometry. Some things are "scalable", while others are not. A software database program that works the same for 100 entries as it does for 1 million entries is "scalable"; a program that needs to be reworked and reprogrammed as the database grows larger is not scalable. One of the terrific features of "wiki" software used by Conservapedia is that it is scalable: almost no adjustments were needed as the number of its entries increase from 1 to 1000 to over 30,000 now, or even to a million entries in the future. |
| | | | |
| | “Increasing returns to scale” means that when you increase all the inputs, then your company’s output increases by an even greater proportion. For example, if you double your inputs then perhaps your output triples. That would be extremely profitable for your business. Your costs only double, but your revenue triples. Your profits skyrocket. It is a formula for success. | | “Increasing returns to scale” means that when you increase all the inputs, then your company’s output increases by an even greater proportion. For example, if you double your inputs then perhaps your output triples. That would be extremely profitable for your business. Your costs only double, but your revenue triples. Your profits skyrocket. It is a formula for success. |
| | | | |
| − | Wal-Mart’s “secret” to its success would, among the choices, be “increasing returns to scale.” The bigger it gets, the more efficient it becomes, the cheaper it can buy goods for (because it is obtaining volume discounts), and the more output it can produce. | + | Wal-Mart’s “secret” to its success would is its “increasing returns to scale.” The bigger it gets, the more efficient it becomes, the cheaper it can buy goods for (because it is obtaining volume discounts), and the more output it can produce. It is not simply that Wal-Mart's output increases as it grows bigger, but its output (and revenue) increase by more than its costs do. That greater proportional increase becomes profits. |
| | | | |
| − | Meanwhile, there is nothing special about constant returns to scale, which is to be expected. But decreasing returns to scale is a disaster for a business that is growing. So is diminishing returns to labor. If bigger is better, and it is for Wal-Mart, then the correct answer is “increasing returns to scale.” | + | Meanwhile, there is nothing special about constant returns to scale, which is to be expected. But decreasing returns to scale is a disaster for a business that is growing. So is diminishing returns to labor. |
| | | | |
| − | What are the returns to the scale of the world population? It likely has increasing returns to scale. Twice as many people may mean more than twice as much output. Humans are creative, and twice as many humans would probably mean more than twice as many inventions like the light bulb, as people build on the work of others.
| + | ''Simple rule'': If "bigger is better," and it is for Wal-Mart, then there are increasing returns to scale.” |
| | | | |
| − | So, then, what is the Law of Diminishing Returns? That is a rule that applies to ONLY ONE input. It is when a company keeps its assembly line and factor size constant, for example, but keeps hiring more and more of one input, such as labor. Eventually each added employee will have less and less to do. The returns on the additional employees declines. But if all inputs were increased at the same time, then the Law of Diminishing Returns does not apply. Then it is a question of returns to scale.
| + | What are the returns to the scale for the world population? It likely has increasing returns to scale. Twice as many people means more than twice as much output. Humans are creative, and twice as many humans would probably mean more than twice as many inventions like the light bulb, as people build on the work of others. |
| | + | |
| | + | ===Review: Law of Diminishing Returns=== |
| | + | |
| | + | What is the Law of Diminishing Returns? That is a rule that applies to ONLY ONE input. It is when a company keeps its assembly line and factor size constant, for example, but keeps hiring more and more of one input, such as labor. Eventually each added employee will have less and less to do. The returns on the additional employees decline. But if all inputs were increased at the same time, then the Law of Diminishing Returns does not apply. Then it is a question about returns to scale. |
| | | | |
| | Consider this question: | | Consider this question: |
| | | | |
| − | “The more someone has, the more he wants to make to be satisfied!” What economics principle would best explain that phenomenon? | + | “The more someone has, the more he wants in order to be satisfied!” What economics principle would best explain that phenomenon? |
| | | | |
| | (a) Law of Demand | | (a) Law of Demand |
| Line 66: |
Line 70: |
| | Know these concepts like the back of your hand, and learn from your mistakes. There will be a final exam when you can prove how much you learned. | | Know these concepts like the back of your hand, and learn from your mistakes. There will be a final exam when you can prove how much you learned. |
| | | | |
| − | By the end of the course, make sure you understand the concepts in the problems that you missed. Make sure you answer them correctly on the final exam. | + | By the end of the course, make sure you understand the concepts in the problems that you missed on the midterm. Make sure you answer them correctly on the final exam. One of the questions on the final exam will be identical to a question on the midterm. |
| − |
| + | |
| | ==So you want to make some money?== | | ==So you want to make some money?== |
| | | | |