LAW OF DIMINISHING RETURNS

What is the Purpose?

The Purpose of the Law of Diminishing Returns is to measure how efficient a business is making a product, not necessarily how much of the product they make?

Is there a difference between output and efficiency?

Hypothetically????

If I assigned you the task of creating a booklet of information and gave you the following instructions…how many people would be needed to EFFICIENTLY complete the task?

You are to take two pieces of paper, each with printed information about the C&E Course, sort them into piles, staple them together and then stack them in a pile.

Law of Diminishing Return

Level of production in which the marginal product of labor decreases as the number of workers increase

Marginal Product of Labor - The "marginal product" of labor (MPL) is defined as the change in total product from expanding labor input by one unit while holding capital constant.

The "law of diminishing returns" states that adding additional amounts of labor to a fixed amount of capital will eventually reduce labor’s marginal product.

Locate these points on the chart

Efficiency

Underutilization

Maximization of output

Example

Labor (# of Workers)

Output Marginal Product of Labor

0 0 -

1 4 4

2 10 6

3 17 7

4 23 6

5 28 5

6 31 3

7 32 1

8 31 -1

Fixed Costs Do not change regardless of how many goods

are produced Fixed interest rate

Variable Costs Costs that vary when the amount of products that

are produced change Variable interest rates

Total Costs Add the variable and fixed together