Test on Law of Diminishing Marginal Returns

The law of diminishing returns applies to the

• Short term

• Economies of scale

• Long run

• Diseconomies of scale

The short run is the time period

• between 1 month and 18 months

• when all the factors of production can be varied

• when at at least 1 of the factors of production is fixed

• when land and capital are often fixed for the firm

In the short run

• is is assumed that labour can be varied

• it is assumed that all the factors of production can be varied

• it is assumed that capital can be varied

• it is assumed that land can be varied

Marginal product means

• extra output from adding a variable input

• total output

• not worth doing

• poor quality product

Why does marginal product initially rise when adding more labour, but then start to fall?

• workers know they are being watched so don't slack off at first

• workers realise that they are being monitored so take it easy

• workers can divide the work up and specialise at first

• workers find that they don't have enough space or access to equipment to be efficient