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An example would be a factory increasing its saleable product, but also increasing its CO 2 production, for the same input increase. [2] The law of diminishing returns is a fundamental principle of both micro and macro economics and it plays a central role in production theory. [5]
[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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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).
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.
It is an increasing function due to the law of diminishing returns, which explains that is it more costly (in terms of labour and equipment) to produce more output. In the short-run, a profit-maximizing firm will: Increase production if marginal cost is less than marginal revenue (added revenue per additional unit of output);
Within marginal utility, the law of diminishing marginal utility describes that the benefit to a consumer of an additional unit is inversely related to the number of current units, demonstrating that the added benefit of each new unit is less than the unit prior. [2] An example of this could be demonstrated by a family buying dinner.