AP MicroeconomicsProduction & Costs
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.
Formula / Example
Sets in when ΔTotal Product ÷ Δvariable input begins to fall.
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