1. The Law of Diminishing (Marginal) Returns
Economics A level – Unit 3
The Law of Diminishing (Marginal) Returns

2. Time Periods
In the immediate period all factors of production are fixed in supply.
In the short-run at least one factor of production is fixed in supply, (this means no firm can enter or leave the market).
In the long run all factors are variable but technology is constant.
In the very long run technology changes.
The law of Diminishing Marginal Returns is a short-run argument

3. The Law of Diminishing (marginal) Returns
We will use the example of a farm – where land, and capital which are fixed in supply and labour is the variable factor.

4. Fixed factors of production
1 Farm
1 Tractor
1 Combine harvester

5. Assumption - all units of the variable factor are homogenous
Labour
Assumption - all units of the variable factor are homogenous

6. Division of labour (specialisation)
Number of
workers n
Total physical
product
TPP
Average Physical
Product
APP=TPP/n
Marginal Physical
MPP=ΔTPP/Δn 1 3 2 10 24 4 36 5 40 6 42 7 8
with only one worker there is no division of labour – time lost switching jobs.
With a second worker they can specialise and are more efficient – the output more than doubles
With a third worker they are now skilled in one area and are not losing much time switching tasks
an eighth worker is now getting in the way .
With a fourth worker more work is done than with three but the additional output is smaller than before.
Employing more workers has no effect on output now

7. Average Physical Product (APP)
Number of
workers n
Total physical
product
TPP
Average Physical
Product
APP=TPP/n
Marginal Physical
MPP=ΔTPP/Δn 1 3 2 10 24 4 36 5 40 6 42 7 8

8. Marginal Physical Product (MPP)
Number of
workers n
Total physical
product
TPP
Average Physical
Product
APP=TPP/n
Marginal Physical
MPP=ΔTPP/Δn 1 3 2 10 5 24 8 4 36 9 40 6 42 7 3
Remember – mid point for marginal values
This example is easy because workers increase by one, but watch other examples might be more complex

9. For the graph you will need -

10. Put paper this way up ‘portrait’
Output on the Y axis
Number of workers on the X axis
Leave room for a second graph.

15. Have you plotted the mid points for the marginal physical product?

18. The Law of Diminishing (Marginal) Returns states:
(also known as the law of variable proportions)
When one or more more factors of production are held fixed, there will come a point beyond which the extra output, from employing additional units of the variable factor, will diminish.