Alexandre Malisani                

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.

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I will use 3 terms to explain the law of diminishing returns, total output, average output and marginal output. The total output is the total product generated by the factors of production. The average output is the total output divided the number of units of the variable factor of production, which in this case are workers. Finally the marginal product is the change in total output when an extra unit of the factor of production is employed (worker).

A numerical example might be as follows:

In this example, we can see how initially the marginal output is rising. ...

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