Law of diminishing returns

Law of diminishing returns - a short-run phenomenon that...

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Law of diminishing returns. The law of diminishing returns says that as successive units  of a variable factor of production are combined with fixed factors of production, the  marginal product of the variable factor of production will eventually decline. The law of  diminishing returns is illustrated in Table  1  . As more and more workers are combined  with the firm's fixed amount of capital, the marginal product of labor eventually starts to  decline; in Table  1  , diminishing returns “set in” beginning with the third worker.  Intuitively, if the firm's capital is fixed at 1 unit, the production possibilities of the firm are  limited. Adding more and more workers cannot alleviate this situation and will eventually  cause the marginal product of additional workers to fall. Note that diminishing returns is 
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Unformatted text preview: a short-run phenomenon that will persist only as long as there are fixed factors of production; in the long-run, it will be possible to vary the amount of the fixed factor capital so as to eliminate the problem of diminishing returns. Table 1 provides a simple numerical example. When the firm combines its fixed unit of capital with one worker, its total product increases from 0 units to 5 units of the good. The marginal product of the first worker is therefore 5 (5 - 0 = 5). If the firm adds a second worker, its total product increases to 15; the marginal product of the second worker is therefore 10 (15 - 5 = 10). Continuing in this manner, it is possible to determine the marginal product of every worker that the firm hires....
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