Explain The Law Of Diminishing Returns

MICROECONOMICS

METHODOLOGY: DEMAND AND SUPPLY

  1. Explain The Law Of Diminishing Returns; [The law of diminishing returns]

 

What Is The Law Of Diminishing Returns?

Law of diminishing returns is an economic law which states, that when one factor of production (for example, labor) is increased in the production process, while other factors (land, capital etc.) remain constant, the yield per item of the inconstant factor will eventually diminish.

If we took labor as an inconstant factor, so the marginal productivity or the yield per item of labor will decline as the output rises, but diminishing returns do not mean adverse yields until the quantity of labor surpasses the available equipment or working area.

This law is only applicable in the short run because it has both fixed and variable factors because, in the long run, all the factors of production are variable.

 

Explanation Of The Law Of Diminishing Returns

  • Assume the labor wage rate is $50, then an additional labor costs $50.
  • MP (Marginal Product) is the items manufactured by an additional labor.
  • TP (Total Product) is the total items manufactured by labors.
  • The MC (Marginal Cost) of an item will be the cost of the labor divided by the amount of additional items that are manufactured.
Quantity(labor)
Q
Marginal Product
MP
Total Product
TP
Marginal Cost
MC
1 3 3 16.67
2 6 9 8.33
3 9 18 5.56
4 12 30 4.17
5 15 45 3.33
6 12 57 4.17
7 9 66 5.56
8 6 72 8.33

 

  • 3 items are produced by the first worker so the MP of the first worker is 3, and the worker costs $50. The MC of those 3 items is 50/3 = 16.67.
  • The MP of the second worker is 6. The MC of those 6 units is 50/6 = 8.33.
  • The MP of the fifth worker is 15. The MC of those 15 units is 50/15 = 3.33.
  • The MP declines after the fifth worker as the law of diminishing sets in. As additional workers produce less, the MC rises.

 

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The graph further explains the law of diminishing returns by giving a graphical representation of how the Marginal Product (MP) starts to decline at a certain stage if you make one factor of production variable and others are kept constant. Like till the fifth worker the MP curve continues to rise because each extra worker is adding more utility to the overall output. But, after the fifth worker, the MP curve starts to decline because adding more workers are providing less utility. Thus, MC also starts to rise after the fifth worker because each worker added is now producing less but the wage rate is same which is resulting in increasing MC cost.

 

More Examples Of Diminishing Returns

 

Studying: If you study a subject 5-6 hours a day, your knowledge on the subject will increase quite a lot. However, if you continue studying it for more than 6 hours a day, the amount that you absorb increases only by a minor amount for the reason that you are exhausted.

 

Extra Workforce: You have a plant which has a capacity of one hundred workers and you are employing one hundred workers. If you want to increase the production during the peak season of your output product by hiring an additional workforce, it will be difficult because the plant’s full capacity is one hundred and after which all the additional workers will provide diminishing returns because of space requirements.
Games: If you love playing games and do it to give yourself a break. But if you continue playing a game continuously for hours its value will decrease and soon you will be feeling drained from doing the same thing for a consecutive number of hours.

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