What is meant by diminishing returns to a factor? Explain its causes
Answers
Definition: Law of diminishing marginal returns
At a certain point, employing an additional factor of production causes a relatively smaller increase in output.
Diminishing returns occur in the short run when one factor is fixed (e.g. capital)
If the variable factor of production is increased (e.g. labour), there comes a point where it will become less productive and therefore there will eventually be a decreasing marginal and then average product.
This is because, if capital is fixed, extra workers will eventually get in each other’s way as they attempt to increase production. E.g. think about the effectiveness of extra workers in a small café. If more workers are employed, production could increase but more and more slowly.
This law only applies in the short run because, in the long run, all factors are variable.
Explanation:
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