Law of Diminishing Marginal Returns
What is Law of Diminishing Marginal Returns?
The law of diminishing marginal returns states that adding more of a variable input to fixed inputs eventually yields smaller increases in output.
As a firm adds workers to a fixed amount of capital, marginal product may rise at first but eventually falls. This causes marginal cost to rise, shaping the upward-sloping part of the cost curves. It applies only in the short run, when at least one input is fixed.
Law of Diminishing Marginal Returns: a worked example
A landscaping crew shares one truck and one mower. Lawns finished per day run 8 with one worker, 20 with two, 30 with three, 36 with four, and 39 with five. Marginal product is the jump at each step: 8, then 12, then 10, then 6, then 3. The second worker still raised marginal product, so diminishing marginal returns set in with the third worker, where marginal product first falls from 12 to 10. Costs follow immediately. At a daily wage of $120, the third worker brings 10 lawns at a marginal cost of $120 ÷ 10 = $12 per lawn, while the fourth brings 6 lawns at $120 ÷ 6 = $20 per lawn. Shrinking marginal product is precisely what drives marginal cost upward.
The mistake students make with law of diminishing marginal returns
Diminishing sounds like shrinking, so students announce that output falls once the law takes hold. Total product is still climbing through that whole range, just in smaller steps, which is why the total product curve keeps rising while its slope flattens. Output only falls once marginal product turns negative, deep into the negative returns region where extra workers get in each other's way. On free response questions, write that marginal product falls while total product continues to rise, and save falling output for a negative marginal product.
Law of Diminishing Marginal Returns questions
Does diminishing marginal returns mean total output is falling?
Total output keeps rising while marginal returns diminish, because each extra worker still adds something, just less than the worker hired before. Output falls only after marginal product turns negative. A crew going from 30 lawns to 36 to 39 shows diminishing marginal returns of 6 then 3, with total product increasing at every step along the way.
Why does the law of diminishing marginal returns apply only in the short run?
The law needs at least one fixed input, and only the short run has one. Marginal returns diminish because more and more workers share the same machines and floor space, so equipment per worker keeps shrinking. In the long run a firm can add a second machine or a bigger building alongside the extra workers, so the input ratio need not deteriorate, and returns to scale describe what happens instead.
How does diminishing marginal returns affect the marginal cost curve?
Marginal cost equals the wage divided by the marginal product of the last worker hired, so a falling marginal product with an unchanged wage forces marginal cost upward. That link gives the marginal cost curve its upward-sloping section. Over the earlier range where marginal product is still rising, marginal cost falls, and the two ranges together produce the U shape drawn on cost diagrams.
Formula / Example
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