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Law of Diminishing returns

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Introduction

Law of diminishing returns The law of diminishing returns occur in short run businesses, when at least one factor is fixed (e.g. Capital). This law state that when a variable factor of production is increased, as workers for example, it reaches a point where the output starts to increase at a slower rate, when the marginal cost declines. I will use 3 terms to explain the law of diminishing returns, total output, average output and marginal output. ...read more.

Middle

A numerical example might be as follows: Capital Workers Total Output Average Output Marginal Output 10 1 20 20 10 2 70 35 50 10 3 110 36,6 40 10 4 145 36,25 35 10 5 175 35 30 10 6 200 33,33 25 10 7 210 30 10 10 8 200 25 -10 In this example, we can see how initially the marginal output is rising. ...read more.

Conclusion

The average output will continue to rise as long as the marginal output is greater than the average. Once the marginal output is below the average as is in the 5th worker employed, then the average will start to decline onwards. The law of diminishing returns can help businesses, which want to maximise their output by minimising their costs. For example, if a business owned the units stated above, they wouldn't employ the 8th worker, and might don't employ the 7th, depending the costs of making the product. Alexandre Malisani 1/2 ...read more.

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