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The Tennis Ball Game - The Law of Diminishing Returns - Activity

Image copyright: Johann Snyman

This activity is designed to give you a practical understanding of the relationship between output (total product) and the quantities of variable factors of production used. The Activity is fairly simple but illustrates a number of important concepts that apply to every business and every organisation; just because it is simple does not mean that it does not reflect exactly the sorts of problems that every business faces at some point, you have to use your imagination! It can be extended to demonstrate what happens to costs and also profits as well as output.

At the end of this activity you should:

• Understand the law of diminishing returns
• Understand the difference between total, average and marginal concepts
• Appreciate the difference between 'production' and 'productivity'
• Appreciate the difference between the short run and the long run
• Appreciate the difference between diminishing returns and returns to scale

To make the Activity work successfully, it is imperative that the rules be followed strictly. The activity consists of an imaginary factory where the business has to move tennis balls from one bucket to another. On successful transfer, the firm generates one unit of output. Initially, the firm has some fixed factors - in this example, capital. The capital stock consists of 2 buckets and a batch of tennis balls. The tennis balls are very delicate and can be easily damaged so care must be taken in transferring them.

The rules are as follows:

• You cannot throw the balls.
• Balls must not be dropped into the bucket - if they are, they are counted as damaged goods and do not count towards final output.
• Any balls dropped between the buckets also become damaged goods.
• Each production run lasts for 30 seconds - you must keep strictly to this time limit.

The Task:

The task is to take balls out of one bucket and place them into the second bucket. At the end of each production run, the firm will add an extra unit of labour to production. The production levels will be recorded at the end of each production run. Your task is to monitor the output levels with each different combination of inputs. The results are recorded on the sheet below.

After the Task:

1. What happened to the level of output when each extra unit of labour was added? Why do you think this is?
2. What combination of factors led to the maximum output? Explain why you think this was.
3. The cost of the factors of production is as follows:
   • Buckets - £100 each
   • Balls - £10 each
   • Labour units - £15 each
   Using this information, continue completing the table by calculating the total cost, the average cost and the marginal cost. (If you are not sure of these concepts, see the PowerPoint Presentation - Theory of Firms [59 KB])
4. Having completed the table, decide on a price for your products and thus calculate the revenue and the profit.
5. At what output did you break even? If you had charged a lower or a higher price, what would have happened to the break-even point?
6. Graph the data on the table - you will need to do diagrams for the following:
   • Total Product
   • Average and Marginal Product
   • Total Cost
   • Average and Marginal Cost
   • Break Even Chart

Think about the following points:

• How could the business improve efficiency?
• How could the business avoid the problems caused by the principle of diminishing returns?