Law of Diminishing Marginal Returns to an Input

Week 2

Definition of Law of diminishing marginal returns

At a certain point, employing an additional factor of production causes a relatively smaller increase in output.

When do diminishing returns occur?

Occur in the short run when one factor is fixed (e.g. capital)

What happens when the variable factor of production is increased to reach its tipping point?

(e.g. labour) It will become less productive and therefore there will eventually be a decreasing marginal and then average product.

Why does this law only apply for short runs?

As in the long run, all factors are variable.

How do you calculate the marginal cost (MC)?, in terms of sandwiches and workers.

It will be the cost of the worker divided by the number of extra sanwiches that are produced.

What happens to MC as MP increases?

MC declines

What is the total product (TP)?, in terms of workers.

The total output produced by workers.

What is the marginal product (MP)?, in terms of workers.

The output produced by an extra worker.

What does the graph look like for Diminishing marginal returns - MC/MP (money and workers)

When do diseconomies of scale occur?

When increased output leads to a rise in LRAC (Long-Run Average Costs)

Graph showing SRAC and LRAC

What runs do diminishing returns relate to? and therefore what is higher?

Short runs, higher SRAC

What runs is Diseconomies of scale concerned with?

Long runs

How does diminishing marginal returns relate to wealth?

As wealth increaases, initally, happiness rises (e.g. buy food, by home). But at a certain level of wealth, gaining more wealth does not lead to a rise in happiness.

What is a graph reflecting happiness and wealth?