Tuesday, October 19, 2010

Diminishing return

The law of diminishing returns holds that we will get less and less extra output when we add additional doses of an input while holding other input fixed. In other words, the marginal product of each unit of input will decline as the amount of that input increase, holding all other inputs constant.
The law of diminishing returns expresses a very basic relationship. As more of an input such labor is added to a fixed amount of land, machinery & other inputs the labor has less & less of the other factors to work with the land gets more crowded, the machineries overloaded and the marginal product of labor declines.
The law of diminishing returns can be shushed out of the putting ourselves in the boots of a farmer performing an agricultural experiment illustrated by table. Given a fixed amount of land and other inputs assume that we use no labor inputs at all with zero labor input there is no corn output. Now add 1 unit of labor to the same fixed amount of land 2000 bushels of corn is produced. The second unit of labor adds only 1000 bushels of additional output, which is less than what the first unit of labor added.

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