The slope of the total variable cost curve behaves in precisely the same way. Figure 8.1 “Acme Clothing’s Total Product Curve” shows the number of jackets Acme can obtain with varying amounts of labor (in this case, tailors) and its given level of capital. A total product curve shows the quantities of output that can be obtained from different amounts of a variable factor of production, assuming other factors of production are fixed.
Why the Law of Diminishing Returns Matters
Suppose you are able to hold constant all other factors—water, sunshine, temperature, fertilizer, and seed—and vary the amount of labor devoted to the garden. Suppose the marginal product of labor kept increasing or was constant. Then you could grow an unlimited quantity of food on your small plot—enough to feed the entire world!
Graph of the Law of Diminishing Returns
The law does not imply that the additional unit decreases total production, which is known as negative returns; however, this is commonly the result. There is an inverse relationship between returns of inputs and the cost of production,24 although other features such as input market conditions can also affect production costs. Suppose that a kilogram of seed costs one dollar, and this price does not change.
- The idea that the marginal product of a variable factor declines over some range is important enough, and general enough, that economists state it as a law.
- Economists David Ricardo and Thomas Robert Malthus contributed to the development of the law.
- Other factors of production could be changed during the year, but the size of the building must be regarded as a constant.
- Beyond the seventh tailor, production begins to decline and the curve slopes downward.
Average total and variable costs measure the average costs of producing some quantity of output. diminishing marginal returns implies Marginal cost is the additional cost of producing one more unit of output. It is not the cost per unit of all units produced, but only the next one (or next few). We calculate marginal cost by taking the change in total cost and dividing it by the change in quantity.
What is the law of diminishing returns?
Even GDP per capita will reach a point where it has a diminishing rate of return on HDI.20 Just think, in a low income family, an average increase of income will likely make a huge impact on the wellbeing of the family. Parents could provide abundantly more food and healthcare essentials for their family. But, if you gave the same increase to a wealthy family, the impact it would have on their life would be minor.
Goods and services produced through the production process are called returns. To demonstrate diminishing returns, two conditions are satisfied; marginal product is positive, and marginal product is decreasing. The concept of average product is often used for comparing productivity levels over time or in comparing productivity levels among nations.
You could add an unlimited number of workers to your plot and still increase output at a constant or increasing rate. If you did not get enough output with, say, 500 workers, you could use 5 million; the five-millionth worker would add at least as much to total output as the first. If diminishing marginal returns to labor did not occur, the total product curve would slope upward at a constant or increasing rate. After the seventh unit of labor, Acme’s fixed plant becomes so crowded that adding another worker actually reduces output. When additional units of a variable factor reduce total output, given constant quantities of all other factors, the company experiences negative marginal returns. Now the total product curve is downward sloping, and the marginal product curve falls below zero.
The marginal product of the fifth unit of labor, for example, is plotted between 4 and 5 units of labor. Also notice that the marginal product curve intersects the average product curve at the maximum point on the average product curve. When marginal product is above average product, average product is rising.
If input increased by 120%, the manufacturer experienced increasing returns to scale. When the quantity of a factor of production cannot be changed during a particular period, it is called a fixed factor of production. For the restaurant, its building is a fixed factor of production for at least a year. A factor of production whose quantity can be changed during a particular period is called a variable factor of production; factors such as labor and food are examples.
In general, it aligns with most economic theories using marginal analysis such as the diminishing rate of satisfaction or utility obtained from additional units of consumption of a particular commodity. Total cost, fixed cost, and variable cost each reflect different aspects of the cost of production over the entire quantity of output produced. In contrast, marginal cost, average cost, and average variable cost are costs per unit.