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ECON 1580 Learning Journal Unit 3

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39 views

ECON 1580 Learning Journal Unit 3

Uploaded by

kudaesithu2
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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ECON 1580

Introduction to Economics
Learning Journal Unit 3

The law of diminishing returns, as described in Chapter 8 of "Principles of Economics" by Libby


Rittenberg and Timothy Tregarthen, is a key economic principle that applies exclusively in the
short-term period. This law states that if one factor of production, like labor, is increased while
other factors, such as capital, remain constant, the additional output generated from each new
unit of the variable factor will eventually decline.

The short-term period is characterized by the presence of fixed factors of production. For
example, a firm might have a fixed amount of machinery or a fixed size of factory space. In this
period, firms can only adjust variable inputs like labor or raw materials, while fixed inputs
cannot be changed.

Initially, when additional units of a variable factor (e.g., workers) are added to fixed inputs (e.g.,
machines), the output increases significantly because the fixed inputs are not fully utilized.
However, as more of the variable input is added, the benefit from each additional unit decreases.
This is because the fixed inputs become a limiting factor. The additional workers, for instance,
have less machinery to work with, leading to lower productivity per worker.

1. Fixed Inputs Constraint: The key reason the law of diminishing returns applies only in the
short term is due to the constraint of fixed inputs. As more variable inputs are added, the
efficiency of each additional input decreases because they are increasingly crowded around the
fixed resources. For example, adding more workers to a factory with a set number of machines
means that workers will eventually have to wait for machines, reducing their efficiency.

2. Capacity Limitations: The physical capacity of fixed inputs is another critical factor. For
instance, a fixed plot of land can only support a certain amount of labor and capital before
overcrowding leads to inefficiencies. After this point, adding more labor does not proportionally
increase output because the land’s capacity is maxed out.
3. Efficiency Decline: Overcrowding and operational inefficiencies occur as too many variable
inputs utilize a limited fixed input. For example, a factory might become crowded with too many
workers, leading to a decrease in productivity as workers struggle to share limited machinery and
workspace.

In the long term, all factors of production can be adjusted. Firms can invest in additional capital,
such as more machinery or larger facilities, allowing them to increase the efficiency of additional
variable inputs. This flexibility negates the law of diminishing returns, which is why it applies
only in the short term when at least one factor remains fixed.

In summary, the law of diminishing returns is a short-term phenomenon resulting from the
limitations imposed by fixed factors of production. In the long term, where all inputs are
variable, firms can avoid diminishing returns and optimize their production processes.

References:
Principles of Economics by Libby Rittenberg and Timothy Tregarthen

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