If there are fixed units, increased use of variable input will continue to increase production at a decreasing rate because of congested us of the fixed inputs. It implies that in these portions of the isoquants, the marginal product of labour and capital is positive.
Both the situations are impossibilities because nothing can be produced either with only labour or only capital. The output has doubled but the amount of labour employed has not increased proportionately.
Returns to a factor relate to the short period production function when one factor is varied keeping the other factor fixed in order to have more output, the marginal returns of the variable factor diminish.
This proves that the marginal returns or physical productivity of the variable factor, labour, have diminished. To these internal diseconomies are added external diseconomies of scale.
In this case, the production function is homogeneous of degree less than one. A profit maximisation firm faces two choices of optimal combination of factors inputs: Further, JK quantity of labour is required to raise output from to and KL of labour to raise output from to The prices of units of labour w and that of capital r are given and constant.
It is also commonly referred to as law of diminishing marginal returns in economics which states that an additional unit of input in one factor of production results in a decline in the per unit production if the remaining factors are not changed.
Merge this question into Split and merge into it SAVE In Economics The principle of diminishing returns to inputs is when more on one input is added, while other inputs are held constant, the marginal product of the input diminishes.
For example, a firm hiring more employees while keeping the same office space can increase total output, but every additional employee produces less additional output than the one before him.
Therefore, the firm will choose the minimum cost point M which is the least-cost factor combination for producing units of output.
This shows that the marginal returns of the variable factor, labour, have diminished. What's the difference between diminishing marginal returns and returns to scale? All these factors tend to raise costs and the expansion of the firms leads to diminishing returns to scale so that doubling the scale would not lead to doubling the output.
Given these assumptions, we first explain the relation between constant return to scale and returns to a variable factor in terms of Figure There is only one: This is known as the stage of diminishing returns.Q: Distinguish between the law of diminishing marginal returns and diminishing returns to scale.
A: The law of diminishing marginal returns states that in the short run production, as the number of units of labour increases, the marginal product of an additional unit of labour will eventually be less than the marginal product of the previous unit of labour%(3).
The main difference between diminishing returns and decreasing returns to scale is that, for diminishing returns, only one input is increased while others are kept constant and, for decreasing returns, all inputs are increased at a constant level. According to the law of diminishing returns, increasing the input of one factor of production.
The main differences between the law of diminishing returns and returns to scale are that one is a concept in the short term, while the other can only occur in the long term. A firm can use both to increase output, and both can /5(3). Law of Diminishing Returns The Law of diminishing returns is a key one in economics.
It isused to explain many of the ways the economy works and changes. It is a relatively si mple idea;spending and investing more and more in a product where one of the factors of productionremains the same means the enterprise will eventually run out. Difference between Diminishing Returns and Decreasing Returns to Scale.
Diminishing returns and decreasing returns to scale are two of the most important concepts in economic studies. It is also commonly referred to as law of diminishing marginal returns in economics which states that an additional unit of input in one.
The law of diminishing returns appears under different names although the fundamental underlying principle is the same. It is also known as diseconomies of scale, diminishing marginal utility, law of decreasing returns and the law of variable proportions.Download