TUTORIAL-2

Exercise: CONBLOCK company which is in manufacturing cement products has a factory building with a floor
area of 400 square meter. Manufacturing of standard concrete blocks were carried out for an order received
from Ninthavur Pradeshiya Sabha as per the data given below. If the wage per labour is LKR 1000, identify the
areas of increasing return, constant return, and diminishing return. Analyze this production issue involving
decreasing cost, constant cost, and increasing cost.
Floor area Labour (L) TP (No) MP (No) AP (No) TC MC
(Sq.m)
400 01 100 100 100.0 1000 10
400 02 250 150 125.0 2000 6.67
400 03 450 200 150.0 3000 5.00
400 04 700 250 175.0 4000 4.00
400 05 1000 300 200.0 5000 3.33
400 06 1350 350 225.0 6000 2.86
400 07 1700 350 242.9 7000 2.86
400 08 2000 300 250.0 8000 3.33
400 09 2250 250 250.0 9000 4.00
400 10 2450 200 245.0 10000 5.00
400 11 2600 150 236.4 11000 6.67
400 12 2700 100 225.0 12000 10.00
400 13 2750 50 211.5 13000 20.00
400 14 2750 0 196.4 14000
 Total Production Labour (L) TP (No) difference
3000 01 100 100
02 250 150

2500
03 450 200
04 700 250
05 1000 300
2000
06 1350 350
Total Production

07 1700 350
1500 08 2000 300
09 2250 250

1000
10 2450 200
11 2600 150
12 2700 100
500
13 2750 50
14 2750 0
0
0 2 4 6 8 10 12 14 16
Labour
• While other inputs are fixed changes in the labour make a change in
the total production
• Labour 1-6 TP is increasing at an increasing rate in this phase, it is
profitable for the firm to continue employing more units of the
variable factor to increase its production
• Called the stage of increasing returns to a factor
• Labour 7-14 TP increases at a diminishing rate and reaches its
maximum
• This stage is called the stage of diminishing returns to a factor
 • Labour 1-6 in the production process
where MP is increasing and reaches its
Marginal Production
400 maximum point.
350 350 • Called the stage of increasing returns to a
350

300 300 factor

300
• Labour 6-7 being at a constant rate of
MARGINAL PRODUCTION

250 250
250
350 units
200 200
200
• Called the stage of Constant returns to a
150 150
150 factor
100 100
100 • Labour 7-14 MP is declining but note that
50 it still remains positive. The stage ends
50

0 where MP = 0
0
0 2 4 6 8 10 12 14 16 • This stage is called the stage
LABOUR
of diminishing returns to a factor.
 Marginal Cost • The Marginal Cost curve is U-shaped.
25
• For the first 5 Labours, marginal cost declines
from LKR10 to a low of LKR 3.3.
20
• In fact, the negatively-sloping portion of the
Marginal Cost curve coincides exactly with
increasing marginal returns in production
15

• However at the level of 6-7 labour usage

MC

production remain constant. Constant portion

10
of Marginal Cost curve coincide with constant
marginal returns
5
• At Labour usage 7-14 ,marginal cost increases.
The positively-sloping portion of The Marginal
Cost curve coincides exactly with decreasing
0
0 2 4 6 8 10 12 14
marginal returns in production.
LABOUR
Example: PERALIMANI & Company is a garment manufacturing organization for orders. They received an order for
4000 Tea Shirts from South Eastern University of Sri Lanka. If the company can fluctuate production as per the chart given
below with a limited number of sewing machines and a constant floor area, identify the situations of decreasing cost,
constant cost, and increasing cost. At constant cost and maximum labour input, how many days the company will take to
complete the order? Analyze this production issue involving increasing return, constant return, and diminishing return of
savings. Assume the wage per Labour is LKR 1500.

Floor area (Sq.m) Labour (L) TP (No) MP (No) AP (No) TC MC

200 01 4 04 4.0 1500 375
200 02 10 06 5.0 3000 250
200 03 18 08 6.0 4500 188
200 04 28 10 7.0 6000 150
200 05 40 12 8.0 7500 125
200 06 54 14 9.0 9000 107
200 07 70 16 10.0 10500 94
200 08 86 16 10.8 12000 94
200 09 100 14 11.1 13500 107
200 10 112 12 11.2 15000 125
200 11 122 10 11.1 16500 150
200 12 130 08 10.8 18000 188
200 13 136 06 10.5 19500 250
200 14 140 04 10.0 21000 375
 Labour (L) TP (No) difference
Total Production
01 4 4
160
02 10 6
Increasing
140 03 18 8 returns to
04 factor of
28 10
production
120 05 40 12
06 54 14
100 07 70 16 Constant
08 return
86 16
TP

80
09 100 14
TP (No)
10 112 12
60
11 122 10 Diminishing
12 Return
40 130 8
13 136 6
20 14 140 4

0
1 2 3 4 5 6 7 8 9 10 11 12 13 14
LABOUR
 • Labour 1-7 in the production process where MP is
increasing and reaches its maximum point.
Marginal Production • Called the stage of increasing returns to a factor
18
• Labour 7-8 being at a constant rate
16
• Called the stage of Constant returns to a factor
14
• Labour 8-14 MP is declining but note that it still
12
remains positive. The stage ends where MP = 0
Marginal Production

10 • This stage is called the stage of diminishing

8 MP (No) returns to a factor.
6

0
0 2 4 6 8 10 12 14 16
Quatantity
 160 Points to Note:
When AP is rising it is always less than MP
140 and when it is falling it is always greater than
MP.
120
MP = AP when AP is at its max.
100
MP = 0 when TP reaches its max and AP = 0
when TP = 0
TP/MP

80

60

40

20

0
0 2 4 6 8 10 12 14 16
Labour

TP MP AP
  From A - B marginal cost is in a decreasing trend.
Therefore a marginal cost line shows a negative
Marginal Cost
slope. From the point A-B Marginal Cost curve
400
represents increasing marginal returns
350
 B-C Marginal cost remain constant. Slope of the
300
marginal cost curve is zero. From the point B-C
250 Marginal Cost curve represents Constant
marginal returns.
MC

200

150
 From C- D marginal cost is in an increasing trend.
Therefore a marginal cost line shows a positive
100 slope. From the point C- D Marginal Cost curve
represents diminishing marginal returns
50

0
0 2 4 6 8 10 12 14 16
LABOUR

MC
• In calculating the number of days to complete the order company has
to consider the marginal cost being at constant rate which at highest
labour input.
• Here constant Marginal Cost is at the labour input 7,8 and the output
are 70 and 86 respectively. Among that Maximum output at the
constant marginal cost is 86.
• Means that 86 t shirts were produced by 8 labours in a day.
• Therefore no of days taken to produce 4000 t-shirts= 4000/86
= 46.5 days
= 47 days