Explain the law of ‘diminishing law of marginal returns’. Ans: In economics, diminishing returns refers to progressive decrease in the marginal (per-unit) output of a production process as the amount of a single factor of production is increased, while holding the amounts of all other factors of production constant. The law of diminishing returns states that in all productive processes, adding more of one factor of production, while holding all others constant, will at some point yield lower per-unit returns. The law of diminishing returns does not imply that adding more of a factor will decrease the total production, a condition known as negative returns, though in fact this is common. Diminishing Returns occurs in the short run when one factor is fixed (e.g. Capital) If the variable factor of production is increased, there comes a point where it will become less productive and therefore there will eventually 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 the effectiveness of extra workers in a small café. If more workers are employed production could increase but more and more slowly. This law only applies in the short run because in the long run all factors are variable. Assume the wage rate is £10, then an extra worker Costs £10. The Marginal Cost (MC) of a sandwich will be the Cost of the worker divided by the number of extra sandwiches that are produced. Therefore as MP increases MC declines and vice versa
A good example of Diminishing Returns includes the use of chemical fertilizers- a small quantity leads to a big increase in output. However, increasing its use further may lead to declining Marginal Product (MP) as the efficacy of the chemical declines.
Please join StudyMode to read the full document