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Learning Journal Unit 3

The law of diminishing returns states that as more variable inputs are added to fixed inputs, the additional output produced decreases over time. This principle is particularly relevant in the short term due to fixed inputs and capacity constraints, which lead to inefficiencies when the optimal number of inputs is exceeded. In contrast, long-term adjustments allow businesses to change all inputs, potentially avoiding the diminishing returns seen in the short term.

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5 views

Learning Journal Unit 3

The law of diminishing returns states that as more variable inputs are added to fixed inputs, the additional output produced decreases over time. This principle is particularly relevant in the short term due to fixed inputs and capacity constraints, which lead to inefficiencies when the optimal number of inputs is exceeded. In contrast, long-term adjustments allow businesses to change all inputs, potentially avoiding the diminishing returns seen in the short term.

Uploaded by

freshtamoadab
Copyright
© © All Rights Reserved
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Download as DOCX, PDF, TXT or read online on Scribd
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Learning Journal Unit 3

Frishta Moadab
Department of Business, University of People
ECON 1580- 01

Prof. Lazaqrvius Ferguson


July 12, 2024
The law of diminishing returns is an important economic principle stating that as more units of a variable
input (such as labor) are added to a fixed input (like capital or land), the additional output each new unit
of input produces eventually decreases. This concept is particularly relevant in the short-term period,
and here's why:

1. Fixed Inputs: In the short term, businesses operate with at least one fixed input. For example, a
factory may have a set number of machines or a limited amount of space. When more workers are
added to these fixed resources, they have to share the same equipment and workspace. Initially, this
can increase output, but after a certain point, the effectiveness of each additional worker declines
because there are only so many machines and so much space to go around. This crowding and resource-
sharing lead to a decrease in the marginal productivity of labor.

2. Capacity Constraints: Short-term operations face significant capacity constraints. Imagine a small
bakery with a limited number of ovens. As more bakers are hired, they start to get in each other's way
because there's only so much oven space. Initially, productivity increases because tasks can be divided
and specialized. However, once the optimal number of bakers is surpassed, adding more bakers leads to
inefficiencies. The extra bakers have to wait for oven space, which means their contributions are less
effective, demonstrating diminishing returns.

3. Adjustments in Production: In the short term, firms are limited in their ability to adjust their
production scale significantly. They can only tweak variable inputs like labor or raw materials but can't
immediately expand their fixed inputs like buildings or machinery. Therefore, once the optimal
combination of fixed and variable inputs is reached, any further addition of the variable input leads to
inefficiencies and lower marginal returns. This limitation is a key reason why diminishing returns are a
short-term issue.

4. Time for Changes: The distinction between short-term and long-term periods hinges on the ability to
change fixed inputs. The short term is characterized by the inability to alter fixed inputs, whereas in the
long term, all inputs become variable. Given enough time, a firm can invest in more machinery, expand
its facilities, or find new land. These changes mean that the firm can adjust all aspects of production to
maintain or even enhance productivity, effectively counteracting the law of diminishing returns.

In essence, the law of diminishing returns is a phenomenon that primarily manifests in the short term
because of the constraints and fixed nature of some inputs. In the long term, businesses have the
flexibility to adjust all factors of production, allowing them to scale up operations efficiently and
potentially avoid the diminishing returns that plague short-term scenarios. This adaptability and capacity
for expansion underscore why the law of diminishing returns is a short-term concept, highlighting the
difference between immediate operational limitations and long-term strategic growth.

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