Law of Diminishing Returns

• Law of diminishing marginal returns


  A phenomenon that will affect the business in the short run, i.e. when there is at least one fixed factor of production
• Short run


  A period of time where there is at least one fixed factor of production, normally capital and land
• Variable factor of production

  Labor
• Law of diminishing returns

  Total or marginal product will initially rise and then fall when variable factors of production (labor) are added to a stock of fixed factors of production (land and capital)
• Employing more workers


  Increases output (total product)
• Marginal product


  The extra output/product when one more worker is employed
• Average product


  Total product divided by the quantity of workers
• Marginal product


  Initially rises, then falls more steeply than average product
• Average product


  Initially rises, then falls
• Marginal product curve


  • Cuts the average product curve at its highest point
• Stages of marginal product curve

  1. Section 1 (rising): Specialization and under-utilization of fixed factors

  2. Section 2 (falling): Fixed factors become a constraint, workers start to affect each other's output
• Total product


  Increases at a slower rate, then starts to fall, maximized when marginal product is 0
• The law of diminishing returns can explain the shape of many cost curves in the short-run for a firm