Diminishing Returns
Diminishing returns
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In economics, diminishing returns (also called diminishing marginal returns) refers to how the marginal production of a factor of production starts to progressively decrease as the factor is increased, in contrast to the increase that would otherwise be normally expected. According to this relationship, in a production system with fixed and variable inputs (say factory size and labor), each additional unit of the variable input (i.e., man-hours) yields smaller and smaller increases in outputs, also reducing each worker's mean productivity. Conversely, producing one more unit of output will cost increasingly more (owing to the major amount of variable inputs being used, to little effect).
This concept is also known as the law of diminishing marginal returns or the law of increasing relative cost. Contents[hide] * 1 Statement of the law * 2 History * 3 Examples * 4 Returns and costs * 5 Returns to scale * 6 See also * 7 References * 8 Sources |
[edit] Statement of the law
The law of diminishing returns has been described as one of the most famous laws in all of economics.[1] In fact, the law is central to production theory, one of the two major divisions of neoclassical microeconomic theory. The law states "that we will get less and less extra output when we add additional doses of an input while holding other inputs fixed. In other words, the marginal product of each unit of input will decline as the amount of that input increases holding all other inputs constant."[2] Explaining exactly why this law holds true has sometimes proven problematic.
Diminishing returns and diminishing marginal returns are not the same thing. Diminishing marginal returns means that the MPL curve is falling. The output may be either negative or positive. Diminishing returns means that the extra labor causes output to fall which means that the MPL is negative. In other words the
From Wikipedia, the free encyclopedia
Jump to: navigation, search
In economics, diminishing returns (also called diminishing marginal returns) refers to how the marginal production of a factor of production starts to progressively decrease as the factor is increased, in contrast to the increase that would otherwise be normally expected. According to this relationship, in a production system with fixed and variable inputs (say factory size and labor), each additional unit of the variable input (i.e., man-hours) yields smaller and smaller increases in outputs, also reducing each worker's mean productivity. Conversely, producing one more unit of output will cost increasingly more (owing to the major amount of variable inputs being used, to little effect).
This concept is also known as the law of diminishing marginal returns or the law of increasing relative cost. Contents[hide] * 1 Statement of the law * 2 History * 3 Examples * 4 Returns and costs * 5 Returns to scale * 6 See also * 7 References * 8 Sources |
[edit] Statement of the law
The law of diminishing returns has been described as one of the most famous laws in all of economics.[1] In fact, the law is central to production theory, one of the two major divisions of neoclassical microeconomic theory. The law states "that we will get less and less extra output when we add additional doses of an input while holding other inputs fixed. In other words, the marginal product of each unit of input will decline as the amount of that input increases holding all other inputs constant."[2] Explaining exactly why this law holds true has sometimes proven problematic.
Diminishing returns and diminishing marginal returns are not the same thing. Diminishing marginal returns means that the MPL curve is falling. The output may be either negative or positive. Diminishing returns means that the extra labor causes output to fall which means that the MPL is negative. In other words the