The Law of Diminishing Returns in a Toy Truck Factory

The law of diminishing returns is a simple, yet fundamental concept in economics. When the producer of a good wishes to expand its output, in the short-run it may do so by employing more workers or having its existing workers work longer hours. To acquire more capital and technology or to build new factories takes time and money, thus we say that in the short-run, a firm’s plant size is fixed; the only variable resource is labor.

But to what extent can production increase when only the amount of labor employed can change? This video lesson explains the principle of diminishing marginal returns, which says that as additional units of a variable resource (labor) are added to a fixed resource (capital), beyond a certain point the output attributable to additional units of the variable resource will decline. With only a limited supply of technology at their disposal, workers in a factory can only increase their productivity to an extent.

If a firm wishes to expand its production in the long-run, it must acquire more capital in order to allows for continued increases in the productivity of labor. This video will illustrate, using a toy truck factory employing tools and labor, the principle of diminishing marginal returns.

For some lesson ideas and blog posts on Diminishing Returns, check out this page from my blog: Economics in Plain English – the Law of Diminishing Marginal Returns


Money Creation in a Fractional Reserve Banking System

In this video we illustrate the process by which money is created in a fractional reserve banking system. Due to the fact that at any given time a bank must only keep a certain percentage of its total deposits on reserve, an initial deposit of a certain amount of money will be multiplied as the bank loans out any excess reserves, whose spending leads to further new deposits and even further loans in the economy.

Through this process money is actually multiplied and created. This gives monetary policy makers the ability to stimulate or contract the overall level of spending in an economy through its buying and selling of government bonds from the private sector on the open market.


The Tools of Monetary Policy

This video lesson graphically presents the three tools Central Banks have at their disposal for managing the level of aggregate demand in the economy. Through increasing or decreasing the money supply, a central bank has influence over the interest rates in a nation, and therefore over the level of investment and consumption among firms and households. To accomplish this, three tools are employed: The reserve requirement, the open market purchase or sale of government bonds, and the discount rate.

This lesson illustrates these three tools and explains the relative importance of each to monetary policy makers.

After watching this video, consider reading and responding to the discussion questions for the following blog posts:


Introduction to the Money Market

Macroeconomics policymakers have two general tools in their kit to manage the level of aggregate demand in an economy. The first is fiscal policy, which involves government changing the levels of taxes and government spending to manage demand. Central banks engage in the second type of demand-management, known as monetary policy. By changing the supply of money available in a nation, central banks can raise and lower interest rates and thereby stimulate or contract the level of aggregate demand in the nation.

This video lesson introduces the money market, a model essential to understanding the workings of monetary policy. The supply and demand for money are introduced, and the basic effect of monetary policies are modeled in the simple money market diagram. In later videos, the various tools available to monetary policy makers will be explained and evaluated using the money market model.

After watching this video, consider reading and responding to the discussion questions for the following blog posts:


The Tragedy of the Commons as a Market Failure

One notable form of market failure arises due to a phenomenon first articulated by American ecologist Garrett Hardin, who warned of the Tragedy of the Commons. In his 1968 essay, Hardin explained that when there exist common resources, for which there is no private owner, the incentive among rational users of that resources is to exploit it to the fullest potential in order to maximize their own self gain before the resource is depleted. The tragedy of the commons, therefore, is that common resources will inevitably be depleted due to humans’ self-interested behavior, leaving us with shortages in key resources essential to human survival.

In this video lesson the market failure of common access resources is explained and applied to three such resources being depleted in an unsustainable manner by the world’s people today: fish in the seas, trees from the forests and air in our atmosphere.

After watching this video, you may find the following blog posts particularly useful in learning and understanding what makes common resources a market failure:


The Long-run Phillips Curve

In the second lesson on the Phillips Curve model we will further explore the relationship between unemployment and inflation in an economy, this time examining what happens in the long-run, or the flexible-wage period, following a change in aggregate demand in an economy. Will the tradeoff between inflation and unemployment exist even once wages and prices have had time to adjust to the level of demand for a nation’s output?

We will find that, in fact, as an economy self-corrects from changes to aggregate demand and output returns to its full employment level, the unemployment rate will always return to its natural rate, even as inflation rises and falls with demand in the economy.


The Short-run Phillips Curve

This video lesson introduces a basic Macroeconomic model showing the short-run tradeoff that exists between inflation and unemployment in nation’s economy. By examining the effect that a shift in Aggregate Demand has on the average price level and the level of output and employment, we observe a simple tradeoff: lower unemployment generally comes at the cost of higher inflation, while lower inflation may require higher unemployment.

The following blog posts provide some real world applications of the Phillips Curve theory: