Concepts of the ‘Law of the Firm’ and Tennis Balls

Friday in class we practiced an activity in which our class practiced the some of the concepts of the Law of the Firm. In the game we had two buckets, and a variable amount of workers responsible for moving the balls from one bucket to another. For every ball moved, one product was produced. This process would be repeated with increasing amounts of variable factors, in this case workers. This activity allowed us to form a table consisting of many Law of the Firm concepts. Three of these concepts are the law of increasing return, the law of constant return and the law of diminishing return. The law of increasing return states that for the first few factors of variable cost (workers in our activity) added, the increase in output will be greater than the increase in cost. The law of constant return states that for the following factors of  variable cost added, the increase in output will be equal to the increase in cost. The law of diminishing return states that for the final factors of variable cost added, the increase in output will be less than the increase in cost. According to these concepts, we can set a price for our products, and determine how many workers we should use to produce a set amount of product in order to maximise our revenue to cost ratio, similar to real business.