Law of Diminishing Returns

• What is the definition of the law of diminishing returns? 


  At a certain point, employing an additional factor of production causes a relatively smaller increase in output.
• When does law of diminishing returns occur?


  Diminishing returns occur in the short run when one factor is fixed (e.g. capital).
• Explain the process of law of diminishing returns?


  • If the variable factor of production is increased (e.g. labour), there comes a point where it will become less productive and therefore, there will be a decreasing marginal and then average product.
  • This is because, if capital is fixed, extra workers will eventually get in each other‘s way as they attempt to increase production.
  • E.g. Think about effectiveness of extra workers in a small cafe. If more workers are employed, production could increase but more and more slowly.
• Why does the law of diminishing returns only apply in the short run?


  This law only applies in the short run because in the long run, all factors are variable.
• What is assumed about each point on the long-run average total cost curve?


  The long-run average total cost curve would minimise the average total cost for each level of output.