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TUTORIAL 6 - TUTORIAL 6 WEEK 7 PERFECTLY COMPETITIVE SUPPLY...

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TUTORIAL 6 WEEK 7 PERFECTLY COMPETITIVE SUPPLY: THE COST SIDE OF THE MARKET Reading Text: Ch. 6 Ch. 6 Review Questions: 4, 5, 6 and 7 4. Explaining economic concepts to someone else is a very effective way of checking your own understanding. The law of diminishing returns refers to the fact that, when some factor is fixed, successive units of a variable factor eventually yield smaller and smaller increments in output. The flip side of this is that increasing output will eventually require ever-larger increases in the amount of the variable factor. Adding more labour to a machine, or more fertiliser to a field, will both eventually result in diminishing returns. 5 The u-shape of the short-run AVC curve reflects the law of eventually diminishing returns. When the average productivity of the variable factor rises, AVC will fall. When average productivity of the variable factor falls, AVC will rise. AVC reaches its minimum and has its turning point at the level of output where average returns to the variable factor begin to diminish. Since ATC at any level of output is the sum of AVC and AFC, the u-shape of ATC also reflects the law of diminishing returns. The AVC
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