Online Lessons

Short Run Costs - Law of Diminishing Returns (Online Lesson)

  • Levels: AS, A Level, IB
  • Exam boards: AQA, Edexcel, OCR, IB, Eduqas, WJEC

In this online lesson, we explore fixed and variable costs, and consider how the law of diminishing marginal returns helps to explain the shape of short run cost curves. There is also lots of opportunity to practise those all-important quantitative skills!

WHAT YOU'LL STUDY IN THIS ONLINE LESSON

  • the meaning of fixed, variable and semi-variable costs, along with real-world examples
  • calculating total, average and marginal costs
  • drawing diagrams for total, average and marginal costs
  • the law of diminishing marginal returns, and the relationship between product curves and cost curves

Additional teacher guidance is available at the end of this lesson. Thank you to Cathy Williams and Jon Clark for their contributions to this lesson.

HOW TO USE THIS ONLINE LESSON

Follow along in order of the activities shown below. Most are based on short videos, including activities for you to think about and try at home, as well as some extra worksheet-based activities.

If you would like to download a simple PDF worksheet to accompany the video activities, you can download it here. You can print it off and annotate it for your own notes, or make your own notes on a separate piece of paper to add to your school/college file.

ACTIVITY 1: VIDEO - OVERVIEW OF TYPES OF COST

In this video, we introduce the concepts of fixed and variable costs, and use a real-world example of a pizza delivery company to help you practise classifying costs.

Short Run Costs Video 1

ACTIVITY 2: VIDEO - CALCULATIONS AND DIAGRAMS

This video focuses on some of the essential quantitative skills that you need for your A level Economics. We look at how to calculate average, marginal and total costs, in light of fixed and variable costs. We also take a look at how to draw the associated diagrams.

Short Run Costs Video 2

ACTIVITY 3: GAME - CALCULATING COSTS

Test yourself with this interactive activity on calculating costs - how will you get on?

ACTIVITY 4: QUANTITATIVE SKILLS TEST!

Now that you've had chance to practise your calculating skills, download this calculation test and see if you can complete the table. Ask your teacher to check your answers.

ACTIVITY 5: VIDEO - DIMINISHING RETURNS AND SR COST CURVES

This video tackles the concept of diminishing marginal returns and the impact on productivity of fixed capital with variable labour. We link product curves to cost curves. You can also watch this video from Marginal Revolution University if you want an additional explanation.

Short Run Costs Video 3

ACTIVITY 6: ADDITIONAL READING

Take a look at this article from The Economist. It looks at how economies can initially grow really quickly by simply employing more labour, but ultimately suffer from diminishing returns unless they can innovate.

ADDITIONAL TEACHER GUIDANCE

This lesson comprises:

  • just under 25 minutes of guided video spread across 3 videos
  • around 20-25 minutes of student activity and thinking time across the videos
  • an interactive game and accompanying test on quantitative skills associated with costs (answers to the test can be found here)
  • an article to read on US growth and diminishing returns

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