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THE LAW OF DIMINSHING RETURNS — Economics Keypoint

THE LAW OF DIMINSHING RETURNS

This law states that: “If a given quantity of fixed factor (e.g. land) is combined with increasing quantities of variable factors, output will increase to a certain point, after which successive addition of the variable factors will result to a lesser output per unit of the variable factors.

CONCEPT OF THE LAW OF DIMINISHING RETURNS

FIXED FACTORS: Factors whose supply cannot be varied or increased in the short-run

VARIABLE FACTORS: Factors whose supply can be changed or increased in the short-run.

SHORT-RUN: The period of time over which some factors cannot be varied or increased.

LONG-RUN: The period long enough for the supply of factors to be varied.

A PRODUCT: Utility (goods or services) created by the combination of factors of production.

TOTAL PRODUCT: Which is the total amount of goods produced by all the factors employed over a period of time?

AVERAGE PRODUCT: The total product per unit of the variable factor i.e. total product divided by the variable factor.

MARGINAL PRODUCT: Additional product obtained from the addition of one more unit of the variable factor. It shows the rate of change in the total product as one factor is varied.

 

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