4.1.4.3 The Law of Diminishing returns and returns to scale

Law of diminishing marginal returns

When adding more of a variable input(i.e. labour) to a fixed output(i.e. land/capital) leads to a smaller increase in output

short, at least one

The Law of Diminishing Marginal Returns only applies in the ____ run when __ ______ ___ factor of production is fixed

all the factors of production can be changed(variable)

Why does the law of diminishing marginal returns not apply in the long run?

marginal

the extra/additional change from producing/consuming one more unit

∆X / ∆Q = ∆TP / ∆Q_L

formula for marginal

quickly, gains, reduce it, negative

At first, extra workers help produce more efficiently, so output rises _______.

But after a certain point, adding more workers causes smaller _____ as they get in each other’s way or run of equipment to use.

Eventually, adding more workers might not increase output at all or could even _______ __ (________ returns)

marginal product

• You find diminishing marginal returns by looking at this

• The extra output made when one more of a FofP is added

average product

the total output produced divided by the number of units of a factor employed

returns to scale

describes how output changes in the long run when all the FofP are increased together

constant returns to scale

output rises in the same proportion as inputs(i.e. input doubles, output doubles)

increasing returns to scale

output rises by a greater proportion to input(i.e. input doubles, output triples)

decreasing returns to scale

output rises by a smaller proportion to input

short run, only one input increase whilst others stay constant, output increase at slower rate as more one input is added

difference of diminishing returns from returns to scale

long run, all inputs increase together, output may increase faster/equal/slower rate depending on type

difference of returns to scale from diminishing returns