Explian with diagram the three stages of production why does law of diminshing returns operate
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Answer:
The answer:
Explanation:
THREE STAGES OF PRODUCTION
Stage one:
is the period of most growth in a company's production. In this period, each additional variable input will produce more products. This signifies an increasing marginal return; the investment on the variable input outweighs the cost of producing an additional product at an increasing rate. As an example, if one employee produces five cans by himself, two employees may produce 15 cans between the two of them. All three curves are increasing and positive in this stage.
Stage Two :
Stage two is the period where marginal returns start to decrease. Each additional variable input will still produce additional units but at a decreasing rate. This is because of the law of diminishing returns: Output steadily decreases on each additional unit of variable input, holding all other inputs fixed. For example, if a previous employee added nine more cans to production, the next employee may only add eight more cans to production. The total product curve is still rising in this stage, while the average and marginal curves both start to drop.
Stage Three :
In stage three, marginal returns start to become negative. Adding more variable inputs becomes counterproductive; an additional source of labor will lessen overall production. For example, hiring an additional employee to produce cans will actually result in fewer cans produced overall. This may be due to factors such as labor capacity and efficiency limitations. In this stage, the total product curve starts to trend down, the average product curve continues its descent and the marginal curve becomes negative.
(I am sorry for the absence of the diagram).
LAW OF DIMINISHING RETURNS
Law of diminishing returns explains that when more and more units of a variable input are employed on a given quantity of fixed inputs, the total output may initially increase at increasing rate and then at a constant rate, but it will eventually increase at diminishing rates.
In other words, the total output initially increases with an increase in variable input at given quantity of fixed inputs, but it starts decreasing after a point of time.
The assumptions made for the application of law of diminishing returns are as follows:
i. Assumes labor as an only variable input, while capital is constant
ii. Assumes labor to be homogeneous
iii. Assumes that state of technology is given
iv. Assumes that input prices are given
Let us understand the law of diminishing returns with the help of an example. Suppose a mining organization has machinery as the capital and mine workers as the labor in the short-run production. For increasing the level of production, it can hire more workers.
In such a case, the production function of the organization would be as follows:
Q = f (L), K
Where K is constant
The production function for labor-output relation is assumed to be:
Qc = -L3 + 30L2 + 20L
The different values of Qc can be obtained by substituting different values of L in the equation of production function.
For example, if L is 10, then the value of Q would be as follows:
Qc = – 103 + 30(10)2 + 20(10)
Qc = 2200
Similarly, different values of Qc can be obtained for different values of L.
This output-labor relationship can be represented in the tabular form of a production function.