The law of diminishing returns

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2019-02-08 12:00:28

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The Law of diminishing returns comes into interaction with another economic principle – of increasing opportunity costs. It defines how you will relate between the cost of production factors, resources and production of goods and services. First of all, is taken into account, as cost increases will affect the quantity of products manufactured. And that's assuming that other factors remain unchanged.

This is well illustrated by the following example. Four hundred units of a product are produced using several factors, acting in complex. The number of employees initially equal to two hundred. It is possible to trace the consequences of a gradual increase of this factor (without changing the rest) by increasing each time the number of employees to twenty people. It will be clear that the increase of the resource does not contribute to the growth of output, and therefore income, but rather slows down his pace. The productivity of the workforce, its performance behaves similarly-falls. This is how the law of diminishing returns.

The Reason for this effect is quite obvious. Always there must be balance between resource production, as well as they “work” only in the complex. As a rule, initially all factors are consistent. Naturally, when one of them increases, and the rest remain fixed, there is imbalance. In such circumstances, when the increase of the labour force do not correspond to other resources (e.g., sufficient number of equipment, area, etc.), there can be no question of equity.

In General terms, the law of diminishing returns has the following wording: “the Increase of the release of a product due to the increase of one factor at fixed other gradually decreases”.

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There is one feature that previously the attention was focused. The growth of output of goods falls immediately after increased one factor. First, if not much disturbed, the ratio of resources might even be a performance improvement. But it doesn't last. Starting from a certain volume of goods, disparities violated, and the law of diminishing effect. If you look at the overall picture, the process looks as follows: impact of one resource always depends on its cost or quantity. And that's assuming that other factors remain unchanged.

There are indicators such as average and marginal returns. The latter shows the relationship between the growth of production and increase the resource. Average determines the volume of the commodity produced, correlated with the costs that this issue has caused.

This means that the law of diminishing returns will come into force only when the costs have reached a size which will fit most rational combination of factors. What happens if the cost of a little increase? In this case, the average return will be equal to the limit and reach its maximum.

Considering the law of diminishing marginal returns, it is impossible to avoid operating with a term such as “the ultimate (marginal) value”. They are called relative increments. The marginal value of the economy – its increase due to changes in the factor affecting it, on just one unit. That is, the marginal product-is the growth of its production due to the fact that we use another unit of a factor influencing the issue. In our case – additional resources.

So, the law of diminishing returns suggests that the increasing use of one factor to improve the result, we must not forget that the effect depends on the ratio of the resource to be developed, with others, and not just from its size.

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