MYTUTOR SUBJECT ANSWERS

588 views

What is the law of diminishing (marginal) returns?

This a fundamental for theory of the firm. It explains the shape of the marginal product (MP) curve!

Formal Definition: When one or more factors are held fixed, there will come a point beyond which the extra output from additional units of the variable factor will diminish.

Note the underlying assumptions are:

1)at least one factor is fixed  2) each unit of the variable factor is the same(each worker is equally trained) 3)the level of technology is held constant. 

How to think of it: So at first, adding new workers(variable factor) to a factory will increase output significantly as they can use up free capital and specialize. However, these gains diminish as even more labour is added as the fixed amount of capital becomes over utilised. Workers get in each others way, two or more people doing one job as there is not enough space or capital which means output increases yet at a slower rate(diminishes). 

How to remember it:

The graph is your new bestfriend!

Things to consider:

1) This rule only holds in the short run, as in the long run all factors of production are variable. e.g. the firm can move to a bigger factory, buy more machinery. 

2) Don't confuse diminishing returns and diseconomies of scale! Although similar in principle, diminishing returns refers to production and output levels in the short run, while diseconomies of scale looks at rising costs over the long run!

3) It can go negative! When the marginal product of the variable factor is negative a unit increase in the variable product causes total output to fall. e.g. adding more workers hinders the efficiency of exsiting workers causing actual output to fall. 

Other topics it links to: 

Diminishing marginal utility- as more units of a good are consumed, additional units will provide less additional satisafation than previous units. < This comes under the topic of indifference curves, may not be on ALL alevel syllabus'. 

Yasmin A. A Level Economics tutor, GCSE Economics tutor, GCSE Busines...

11 months ago

Answered by Yasmin, an A Level Economics tutor with MyTutor


Still stuck? Get one-to-one help from a personally interviewed subject specialist

72 SUBJECT SPECIALISTS

£20 /hr

Gleb P.

Degree: BSc International Management (Bachelors) - Warwick University

Subjects offered:Economics, Business Studies

Economics
Business Studies

“I am a passionate and outgoing university student who has a passion for teaching and bringing excitement to the subject.”

MyTutor guarantee

£30 /hr

Anne H.

Degree: History (Bachelors) - Durham University

Subjects offered:Economics, History+ 2 more

Economics
History
English
-Personal Statements-

“Hi, my name is Anne and I'm a second year at Durham university specializing in economic history.”

£20 /hr

Luke H.

Degree: Economics (Bachelors) - Bath University

Subjects offered:Economics, Spanish+ 2 more

Economics
Spanish
Maths
-Personal Statements-

“I am a second year Economics student at the University of Bath, aiming to ensure you fulfil your potential!”

About the author

Yasmin A.

Currently unavailable: for new students

Degree: Business Economics (Bachelors) - Exeter University

Subjects offered:Economics, Business Studies

Economics
Business Studies

“Top tutor from the renowned Russell university group, ready to help you improve your grades.”

You may also like...

Other A Level Economics questions

What is supernormal profit?

What is fiscal policy?

Should the government intervene in cases of market failure

What is meant by an oligopoly being both interdependent and uncertain in their price strategies?

View A Level Economics tutors

We use cookies to improve your site experience. By continuing to use this website, we'll assume that you're OK with this. Dismiss

mtw:mercury1:status:ok