Production and Diminishing Returns

Production in the Short and Long Run The firm is the organisation within which the factors of production are combined to produce an output, which may be a good or service.

A key distinction to make when describing what is produced is between goods and services: goods are tangible whereas services are intangible.

The short run is where at least one factor of production is fixed [usually capital] whereas the long run is where all factors of production can be varied.

Diminishing Returns - The Relationship between Inputs and Output Total product (TP) is the total amount produced by all factors of production employed in a given time period. It is the output of a firm. The average product (AP) of labour is calculated using the following formula: AP = Q/L

Marginal product (MP) is the change in total product resulting from the employment of one more or less in the amount of a variable input. Marginal product of labour (MPL) is the change in total product resulting from the employment of one more or less unit of labour.

Diminising Returns The law, or hypothesis, of diminishing returns determines the shape of the MPL curve. The MPL curve is upward sloping up to the point of diminishing returns, but after that point, it is downward sloping.

The law of diminishing returns states as increasing amounts of a variable factor are applied to a fixed quantity of another factor, after some point the additions to total product (MPL) will begin to fall. After this point, each additional variable unit adds less to total product than the previous unit.

How to Avoid Diminishing Returns

• Create more space for extra workers
• Come up with better organisational structure