Question

Provide concise explanations of the following concepts:

1.Laspeyres (CPI)

2.inflation

3.production function

4.law of diminishing returns

5. return to scale

Answer 1

1) Laspeyres is the price index to measure cost of living using prices as weights and fixed basket of goods.

2) Inflation is the rate of increase in price level of goods and services from previous year price level.

3) production function shows the relationship output and inputs of production. It shows how much output can be produced with given level of inputs.

4) Law of diminishing returns is the situation when increase in output due to increase in unit of input starts falling due to fixity of other inputs.

5) Returns to scale describes what happens when scale of production is changed to changes in output.