The law of diminishing returns says that as we add more units of a variable output to factors of production then output will initially rise and then fall
Diminishing returns occur when marginal revenue starts to fall as each extra worker is adding less to total revenue
Diminishing returns occur as the productivity of extra workers decreases over time
- When output is low other factors of production tend to be under utilised so each worker is able to use the other factors more efficiently increasing productivity
- When production reaches a certain level the factors of production are less plentiful and therefore each worker adds less to productivity
Law of Diminishing Returns & Costs
- Law of diminishing returns can also be called the law of increasing opportunity cost
- There is an inverse relationship between returns of inputs and the cost of production
- Costs per unit of output will therefore start to rise at a certain point
Productivity & Factor Prices + Production & Factor Choices
- The productivity of different factors of production will influence the businesses choice of factor inputs
- Factor prices will also influence the choice of inputs – if some factors are more expensive than others it is likely that the business will choose these over more expensive factors
