This article is about short-run diminishing returns. It defines the concepts of short-run and long-run in Economics. It also explains the differences between short-run and long-run.
In this article, you will learn about The Law of Diminishing Returns and use the concept of marginal returns to explain the various stages of The Law of Diminishing Returns.
The concept of short-run and long-run
The short-run refers to the period of time when at least one factor of production cannot be changed. This is what causes Fixed Costs (FC). For example, as rent is fixed for the short-term such as one year, this limits output as there is limited space for production. It takes time to be able to find a new place to rent and perhaps the company has a contract which it must follow.
The long-run refers to the period of time when all factors of production can be adjusted. There are no Fixed Costs (FC) over the long run.
Production vocabulary
- Input is the resources used in the production process.
- Output is the result of the production process.
- Total product is the quantity of output produced by a given number of inputs over time.
- Average product is the total output per unit of input.
- Marginal product is the additional output produced by one extra unit of input. For example, with 10 workers a factory produces 4,000 per week. If the factory employs 1 more worker and production increases to 4,250, the marginal product is 250.
The Law of Diminishing Returns
‘When one of the factors of production is held fixed in supply, successive additions of the other factors will lead to an increase in returns up to a point, but beyond this point returns will diminish’.
As the table below hows, adding a variable input such as labor to a fixed input such as capital initially increases production. However, the rate of change in production is not constant.
| Increasing returns | Increasing returns | Increasing returns | Increasing returns | Constant returns | Diminishing returns | Diminishing returns | Diminishing returns | Zero returns | Negative returns | ||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Labor | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 |
| Output | 0 | 1 | 3 | 6 | 10 | 14 | 17 | 19 | 20 | 20 | 19 |
| Difference | 0 | 2 | 3 | 4 | 4 | 3 | 2 | 1 | 0 | -1 |
The way to describe changes in output is discussed below to explain different stages in The Law of Diminishing Returns.
- Increasing returns: Each additional unit of input adds more output than the previous one. Labor units from 1 to 4 are examples of increasing returns.
- Constant returns: Each additional unit of input adds the same output as the previous one. Labor unit 5 is an example of constant returns.
- Diminishing returns: Each additional unit of input adds less output than the previous one. Effectively, output is still rising but at a falling amount. Labor units from 6 to 8 are examples of diminishing returns.
- Zero returns: Each additional unit of input adds no output. Labor unit 9 is an example of zero returns.
- Negative returns: Each additional unit of input reduces the level of output. Labor unit 10 is an example of negative returns.
Summary about short-run diminishing returns
In the short-run a company’s ability to increase output is limited. When increases in output start to decline, it is called short-run diminishing returns.
