Diminishing Returns See

Diminishing Returns See

Diminishing Returns. See Variable Proportions, Law of Direct Tax. See Tax, Direct and Indirect.

Discontinuity, the relationship (in time or space) between economic quantities which change by relatively large amounts. Economic theory usually assumes that the relationship is continuous, i.e. connected without a break: e.g. that quantifies of goods demanded and supplied and their prices change by infinitely small amounts, so that a fall in the price of a commodity by the smallest possible amount will cause a correspondingly small expansion in the quantity bought. In a demand curve infinitely small changes in prices are shown on the vertical axis and the accompanying small changes in the quantities demanded on the horizontal axis. In practice very few goods can be bought in infinitely snail amounts, and many are highly indivisible. For example, one must buy a whole washing machine, although it may be shared with a neighbour, or with many neighbours in a launderette; a business man must buy a whole boiler; a firm may have to engage a 'whole' legal or economic adviser, although it may buy part of his time by paying him as a consultant. A graph of the demand curve for such commodities or services would show sharp jumps or breaks instead of the 'continuous' smooth curve yielded by changes taking place by small quantities. Real life illustrations of economic laws are usually discontinuous; but continuous relationships are used in theory because their geometry and mathematics are simpler.

Frequently the assumption of continuity does not upset the conclusions drawn from a piece of analysis based on it. Thus in the general law of demand (which states that, other things equal, more will be bought at a lower price) no serious errors arise if the relationship between price and quantity is treated continuously rather than discontinuously. But sometimes discontinuity affects the conclusions. Thus, as the price of a commodity with two uses falls, more of it may be bought to satisfy one use until saturation is reached. A slight fail in price might induce no further demand; the fall might have to be large before more units were bought to satisfy the second use. The demand curve of such a commodity would have a sharp break between the two prices.

To grasp the essentials of economic ideas and concepts it is best at first to think of them as concerned with quantities between which the relationships are continuous. When the principles have been worked out allowance can be made for discontinuities.

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