Law of diminishing marginal returns

Define the law of diminishing marginal returns?

In the short run, when adding variable factors of production to a scarce stock of fixed inputs initially increases total product (TP) but eventually decreases TP

Identify the difference between the short run and the long run?

• On one hand, in the short run, there is at least one fixed factor of production

• On the other hand, in the long run, all factors of production are variable

Average product (AP) formula

Total product (TP) / Total input (TQ)

Marginal product (MP) formula

Change in total product (∆TP) / Change in Total input (∆TQ)

Describe the average product curve

• Initially increases but after AP = MP, it eventually decreases due to diminishing marginal returns

• Furthermore, AP is maximised when AP = MP because beyond this quantity, MP will continue to decrease and drag AP down with it

Describe the marginal product curve

Initially increases but eventually decreases due to diminishing marginal returns

Describe the total product curve

• Initially increases but when when MP = 0, it eventually decreases due to diminishing marginal returns

• Furthermore, TP is maximised when MP = 0 because beyond this quantity, TP decreases

Analyse why marginal product might initially increase

• Because initially employing inexperienced workers will allow them to specialise, increasing labour productivity

• Additionally, initially employing extra workers to underutilised (fixed) machines will allow them to efficiently produce extra output, increasing labour productivity

• The effect of increasing returns to labour

Analyse why marginal product will eventually decrease

• Because eventually employing extra workers to fully utilised (fixed) machines will prevent them from efficiently producing extra output, decreasing labour productivity

• The effect of diminishing marginal returns