Question

What is the law of diminishing returns? Why does this law become operative?

Hint:

The law of diminishing returns operates in the short run when some inputs are fixed, causing marginal returns to decrease as more variable inputs are added.

Answer 1

Step 1: Defining the Law of Diminishing Returns:
The law of diminishing returns states that as more units of a variable input (such as labor) are added to fixed inputs (such as capital or land), the marginal output produced by each additional unit of the variable input will eventually decrease. Initially, when a few units are added, output increases at an increasing rate, but after a certain point, adding more units results in progressively smaller increases in output.
Step 2: Why the Law Becomes Operative:
The law of diminishing returns becomes operative because, in the short run, some factors of production are fixed. As more labor or other variable inputs are applied to a fixed amount of capital, each additional worker has less capital or equipment to work with. This reduces the productivity of each additional worker, causing the marginal return to diminish. For example, in a factory, adding more workers to the same number of machines may initially increase output, but beyond a certain point, the workers may get in each other’s way, leading to a decline in the marginal productivity of labor.
Step 3: Final Conclusion:
The law of diminishing returns is a fundamental principle in economics that explains the behavior of marginal productivity in the short run. It becomes operative when additional units of variable inputs are added to a fixed amount of resources, leading to progressively smaller increases in output.