![]() ![]() We will use it when we construct the product curve. This “law” is based on experience and speculation, but is not considered particularly controversial. If you, for instance, hire several people, the space will become crowded and the workers will become less efficient. The same thing will happen if you hire other people to work for you:eventually, additional hours or additional workers produce very little additional output. However, if you continue to increase the number of hours, you will eventually not produce many more copies per additional hour. Consequently, the marginal product is higher during the second hour than during the first, and over that interval, we therefore have increasing marginal product. If you increase the number of hours worked by one hour, you will probably make more copies during the second hour than during the first. The machine needs fifteen minutes to warm up, you need to prepare things, etc. You probably will not be able to make many copies during that time. You buy a powerful copying machine and you are the only worker. To use an example: Suppose you start a firm that produces photocopies. ![]() The law of diminishing marginal returns states that the increase will eventually become smaller and smaller when the number of hours worked is large enough. If we increase the number of hours worked, we will probably produce more. Suppose we keep everything constant, except for one single input factor, for instance L. Each new worker is just less productive.Beside the conclusion that "supply = demand", the law of diminishing marginal returns (or the law of diminishing marginal product) is probably the most frequently cited concept from microeconomics. There is diminishing marginal productivity, but the business does not run at a loss when it hires additional workers. It simply increases at a lower rate.Ĭ is incorrect. the cost of an extra worker is higher than the revenue it generates.ĭiminishing returns represent a point at which additions of the input yield progressively smaller increments in output.Ī is incorrect.When there occurs a continuous increase in labor input, diminishing returns start to set in because: However, increased use of these fertilizers causes a declining marginal product. A small amount of fertilizer leads to a large increase in output. Other examples of diminishing returns can be the use of fertilizers (chemical). Candidates might want to visualize this concept by seeing workers “bumping” into each other while undertaking their tasks. It is because the workspace is limited (numbers of ovens, etc.), adding the fourth worker will increase output but will decrease the MP. ![]() The 5th will add merely 7 units of output per hour. However, the fourth worker will only add 10 more hamburgers. ![]() The third worker will add an extra 20 hamburgers. The second worker will add 15 hamburgers because both workers will specialize in one task in particular. The first worker can produce 10 hamburgers per hour. However, the Marginal Product of Labor (MP) denotes the additional units produced by each worker. Here, the input increases with every worker. The following table shows the marginal product of labor for the fast-food restaurant, where MP (marginal product of labor) is the number of hamburgers produced per hour. IllustrationĪssuming the wage rate in a small fast-food restaurant is fixed. The law of diminishing returns applies in the short run because no factor is constant in the long run. When capital is fixed, hiring extra workers will increase production at a slower rate with every additional worker. When a certain variable factor of production increases, it will become less productive and eventually result in a decreasing marginal return. With one factor of production fixed, diminishing returns will occur in the short run. As a result, the factory’s production declines. Consequently, each worker that comes next will provide smaller and smaller returns. With all factors of production held constant, at one point, each supplementary worker will be able to generate less output compared to the worker before him. Example: Law of Diminishing Marginal ReturnsĪ good example is that of a factory that employs many workers and produces at full capacity. The law of diminishing marginal returns states that the marginal return from an increased input, say labor, will decrease when this input is added continually to a fixed capital base. ![]()
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