MYTUTOR SUBJECT ANSWERS

184 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...

4 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

62 SUBJECT SPECIALISTS

£20 /hr

Helena W.

Degree: Economics and Management (Bachelors) - Bristol University

Subjects offered: Economics, Maths

Economics
Maths

“About me: I am a second year Economics and Management Student studying at the University of Bristol. I have always been passionate about maths and figures and love helping people gain the same understanding and appreciation for the di...”

MyTutor guarantee

£20 /hr

Rebecca M.

Degree: BSc Economics (Bachelors) - Leeds University

Subjects offered: Economics, English Literature+ 2 more

Economics
English Literature
-Personal Statements-

“Hi! I'm Rebecca. I'm a first year Economics Student at the University of Leeds. I have 3 years of previous tutoring experience and I'm excited to share my passion for Economics and English Literature with you. Whether you need assista...”

£20 /hr

Jack G.

Degree: Politics, Philosophy, and Economics (Bachelors) - Warwick University

Subjects offered: Economics, Religious Studies+ 2 more

Economics
Religious Studies
Maths
.TSA. Oxford.

“Hello, I'm Jack and am studying politics, philosophy, and economics at Warwick.  Having recently been through the subjects I'm looking to tutor I feel like I know first hand what difficulties you'll be facing. I always found I wanted ...”

MyTutor guarantee

About the author

£20 /hr

Yasmin A.

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

Explain why, in theory, a perfectly contestable market results in an efficient allocation of resources

How do I work out the different elasticites of demand?

What is GDP and is it a useful indicator to measure the standard of living?

Explain how the diagram for a perfectly competitive firm demonstrates static efficiency.

View A Level Economics tutors

Cookies:

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

mtw:mercury1:status:ok