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Chapter 11: Problem 2

What is the law of diminishing returns? Does it apply in the long run?

Short Answer

Expert verified
The law of diminishing returns suggests that increasing one input in a production process will eventually yield less additional output. It primarily applies in the short run when at least one factor of production is fixed but it is also relevant in the long run for decisions on scale and resource allocation.

Step by step solution

01

Understanding the Law of Diminishing Returns

The law of diminishing returns states that in a production process, as one input variable is increased, there will be a point at which the marginal increase in output begins to decrease, holding all other inputs constant. In other words, after a certain point, each additional unit of input will yield less additional output.
02

Applying the Law to the Long Run

The law of diminishing returns primarily applies in the short run because it is in this period where at least one factor of production is fixed. In the long run, all factors of production can vary and firms have enough time to adjust all elements of the production process. Thus, while the law may not apply literally, its principle is still a fundamental insight for long-run decisions on scale and resource allocation.

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Most popular questions from this chapter

What is the difference between total cost and variable cost in the long run?

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