The concept of “diminishing returns to an input” (law of diminishing returns) refers to the fact that during the production process in the [short-term] period, an increase in the amount of one input, while the levels of all other inputs remain unchanged, leads to [reduction] of the marginal product of this input.
The correct answer and explanation is:
Correct Answer:
The concept of “diminishing returns to an input” (law of diminishing returns) refers to the fact that during the production process in the short-term period, an increase in the amount of one input, while the levels of all other inputs remain unchanged, leads to a decline in the marginal product of this input.
Explanation:
The law of diminishing returns is a principle in economics that applies to the short-term production period. In the short term, at least one factor of production is fixed, such as capital or land, while others, like labor, can be varied. The law states that when additional units of a variable input (such as labor) are added to fixed inputs (such as machinery or land), there comes a point at which the marginal product—the additional output produced by one more unit of input—begins to decline.
Initially, increasing the variable input may lead to increasing returns, because workers can specialize and collaborate more effectively. However, as more workers are added to the same amount of capital, overcrowding or inefficiencies may start to appear. This means each new worker contributes less additional output than the previous one, though total output may still rise.
This decline in marginal product happens because the fixed inputs become a limiting factor. For example, if a factory has only a few machines, adding too many workers may lead to idle time or competition for machine use, reducing the efficiency of each worker.
This principle is important in understanding how businesses make decisions about resource allocation. Once diminishing returns set in, the cost of producing additional units increases, affecting pricing, profit margins, and output strategies. Managers must balance input levels to avoid inefficiency and ensure optimal production.