Explain the law of diminishing marginal returns and provide an example of the phenomenon

Q: Explain the law of diminishing marginal returns and provide an example of the phenomenon

The Law of Diminishing Marginal Returns, also known as the principle of diminishing marginal returns.

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It is a fundamental concept in economics that describes how the additional output (or marginal product) gained from adding one more unit of a variable input (while keeping other inputs fixed) will eventually start to decrease.

Key Points:

1. Definition: The Law of Diminishing Marginal Returns states that if you increase one input while keeping other inputs constant, there will come a point where the additional output gained from the extra unit of input will start to decline. In other words, each additional unit of input contributes less to total output than the previous unit.
2. Fixed vs. Variable Inputs:

• Fixed Inputs: Inputs that do not change in the short run (e.g., machinery, factory size).
• Variable Inputs: Inputs that can be adjusted in the short run (e.g., labor, raw materials).

1. Short-Run Concept: This law typically applies in the short run, where some factors of production are fixed while others can be varied.

Example of the Law of Diminishing Marginal Returns:

Scenario: Consider a small bakery with a fixed number of ovens and kitchen space (fixed inputs). The bakery hires additional workers (variable input) to increase production.

1. Initial Stage: When the bakery starts hiring additional workers, each new worker significantly increases the number of baked goods produced. This is because the fixed inputs (ovens, kitchen space) are being used more efficiently.
2. Increasing Returns: At this stage, the additional workers help utilize the ovens more effectively and possibly bring about improvements in the workflow. The output per worker is increasing.
3. Diminishing Returns: After a certain number of workers, the bakery reaches a point where adding more workers results in less efficient use of the fixed inputs. For example, the kitchen space becomes crowded, and workers might start getting in each other’s way, reducing the effectiveness of their labor.
4. Decreasing Returns: Eventually, adding more workers leads to a situation where each additional worker contributes less to total output. The bakery might experience delays, lower productivity, and decreased efficiency because the fixed inputs are overwhelmed by the increasing number of workers.

Illustrative Example:

• 1st Worker: Can bake 50 cakes per day.
• 2nd Worker: Can bake an additional 55 cakes (total 105 cakes).
• 3rd Worker: Can bake an additional 50 cakes (total 155 cakes).
• 4th Worker: Can bake an additional 40 cakes (total 195 cakes).
• 5th Worker: Can bake an additional 30 cakes (total 225 cakes).

Here, the marginal product of each additional worker starts to decline after a certain point due to the limited fixed input (oven space and kitchen area). The bakery’s productivity increases at a decreasing rate, illustrating the law of diminishing marginal returns.

Conclusion:

The Law of Diminishing Marginal Returns is crucial for understanding production efficiency and resource allocation. It highlights the importance of balancing input levels and optimizing the use of fixed resources to achieve the most efficient and productive output.