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The law of diminishing returns (also known as the law of diminishing marginal productivity) states that in productive processes, increasing a factor of production by one unit, while holding all other production factors constant, will at some point return a lower unit of output per incremental unit of input.
In the law of diminishing marginal returns, the marginal product initially increases when more of an input (say labor) is employed, keeping the other input (say capital) constant. Here, labor is the variable input and capital is the fixed input (in a hypothetical two-inputs model).
[10] The law of diminishing marginal returns applies regardless of whether the production function exhibits increasing, decreasing, or constant returns to scale. The key factor is that the variable input is being changed while all other factors of production are being held constant. Under such circumstances diminishing marginal returns are ...
Thus, this function satisfies the law of "diminishing returns"; that is, the marginal product of capital, while always positive, is declining. As capital increases (holding labor and total factor productivity constant), the output increases but at a diminishing rate.
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The law of diminishing returns states the marginal cost of an additional unit of production for an organisation or business increases as the quantity produced increases. [8] Consequently, the marginal cost curve is an increasing function for large quantities of supply.
The law of diminishing marginal returns points out that as more units of a variable input are added to fixed amounts of land and capital, the change in total output would rise firstly and then fall. [15] The length of time required for all the factor of production to be flexible varies from industry to industry.
The law of diminishing returns states that if you add more units to one of the factors of production and keep the rest constant, the quantity or output created by the extra units will eventually get smaller to a point where overall output will not rise ("diminishing returns"). For example, consider a simple farm that has two inputs: labor and land.