The Law of Diminishing Returns

Question 1

Increases in Output are LImited by Diminishing Returns in the Short Run

Answer 1

1. The law of diminishing returns explains what happens when a variable factor of production increases while other factors stay fixed. Because at least one factor stays fixed, the law of diminishing returns only applies in the short run.
2. When you increase one factor of production in one unit, but keep the others fixed, the extra output you get is called the marginal product. E.g. if you add one or more unit of labour, the extra output is the marginal product of labour.
   - Marginal product = is the additional output produced by adding one more unit of a factor input

Question 2

What is marginal product?

Answer 2

• Initially, as you add more of a factor of production the marginal product will increase -> each unit of input added will add more output than the one before
• This might happen because more specialisation is possible with more of a particular factor. As more ppl, are employed, for example, they can specialise in carrying out particular tasks.
• Eventually, if you keep adding units of one factor of production, the other fixed factors will begin to limit the additional output you get, and the marginal product wil begin to fall. E.g. if a clothes manufacturer only has 5 sewing machines, employing a 6th machinist will probably add less output than employing the 5th did, and employing a 7th will add even less.
• This is the point of diminishing returns - the point where marginal product begins to decrease as input increases.

Question 3

Law of Diminishing Returns

Answer 3

The law of diminishing returns says that there is always a point where marginal product begins to decrease
- Law of diminishing returns = if one variable factor of production is increased while other factors stay fixed, eventually the marginal returns from the variable factor will begin to decrease.

Question 4

Diminishing Marginal Returns increase Marginal Cost

Answer 4

1. Marginal returns are related to marginal cost (MC) - as shown in a diagram
   - As marginal returns rise, marginal cost falls
   - As marginal returns fall, marginal cost rises
2. Marginal cost will rise as marginal returns fall because, all other things being equal, if you’re getting less additional output from each unit of input then the cost per unit of that output will be greater.

Question 5

Diminishing Marginal Returns eventually cause Productivity to Fall

Answer 5

1. The law of diminishing returns says that as the level of a variable factor input is increased, marginal product will eventually begin to diminish.
2. As the level of that factor input continues to be increased, the average product will eventually start to fall too, as shown on the right. The MP curve always meets the AP curve when the AP curve is at its maximum.
   * DIAGRAM ON PAGE 43*

Question 6

What is Average Product?

Answer 6

• Average product (AP) is the output produced per unit of factor input
  3. The average product is also known as productivity. E.g. if the variable factor is labour, the labour productivity would be the average output per worker.
  So if a firm employs more and more ppl, it will eventually find that the productivity of those employees falls.
  4. If you then keen adding more of the variable factor, you can even reach a stage where adding further input results in a fall in the total product - e.g. because workers start getting in each other’s way.
• Total Product (TP) is the total output produced using a particular combination of factors inputs
  LOOK AT THE TWO DIAGRAMS ON PAGE 43

Question 7

Productivity can be improved in various ways

Answer 7

1. There are various ways to increase labour productivity - e.g. through better training or better management.
2. Improved technology can also help improve productivity - faster computers could allow employees to achieve more during their working day, for example. (improved technology might also allow a firm to track its costs and productivity more accurately, meaning it can see when it’s encountering the point of diminishing returns)
3. Increasing productivity will allow a firm to reduce its costs of production