The law of diminishing returns Flashcards
The law of diminishing returns
States that when increasing the quantities of a variable factor combined with a fixed factor, eventually the marginal product, then the average product of this variable factor will decline
What happens to total output as more and more labour is employed?
Total output increases up to a certain point, then stops and starts to decrease due to law of diminishing returns. Once you employ more than a certain amount of workers, there wont be enough resources for that many workers to access limited capital and produce efficiently as capital is fixed, making some workers idle.
What happens to average and marginal output as more and more labour is employed?
Average and marginal product increases up to a certain point before MP starts to decrease then AP decreases. There comes a point where it will become less productive. This is because, if capital is fixed, extra workers will make it harder to access limited capital, making some workers idle.
Why does the law of diminishing returns cause the MC and AC to eventually increase as output increases?
Once the law of diminishing returns sets in, each additional worker (employed at the same cost as previous workers) produces less output. Therefore the marginal cost is more expensive.
Examples of LODR causing MC and AC to increase as output increases.
MC=Change in TC/Change in Q
Worker 4 is employed for £100 and produces 51 units of output. MC=100/51=£1.96
Worker 5 is paid the same and produces 46 units. MC=100/46=£2.17.
The LODR sets in at worker 5 and by the same reasoning, AC will begin to rise because TC increases by a faster rate than output does.
AC vs AP
AC=Cost per unit of output
AP=Output per unit of given FOP (e.g. a worker)
MC vs MP
MC=The cost of producing an additional level of output
MP=The extra output produced by an extra unit of FOP (e.g. one extra worker)
