AQA economics unit 3Watch
returns diminish in the ST because fixed factors (factors of production e.g. labour, premises) gets overloaded and there less efficient, this is as if you increase production to 100 but max capacity is 80, theres less space to produce the goods, = less goods produced and marginal returns become smaller and smaller although output still increases, it increases by a smaller amount each time. that's the law of diminishing returns
Does anyone know why law of diminishing returns in the short term and what are the effects to the firms?
It's only in the short run because you can't change fixed costs whereas in the long run you can (long run all costs variable) eg a farmer producing apples in short run can't get all apples because too high up trees and may need equipment which is expensive whereas in the long run he can plant more trees
Only effects I can think of are higher costs of production and more inefficiency
FYI If you're on AQA then Monopolistic competition is not on the syllabus. If you're not on AQA (or want to learn about it anyway) there are some good Youtube videos like Econplusdal's video on monopolistic competition.
A lot of good discussion and Q&A happening for AQA ECON3 in this thread: http://www.thestudentroom.co.uk/show....php?t=3161403
In theory when they increase the number of workers, marginal product will at first rise due to benefits that arise from SPECIALISATION and the DIVISION OF LABOUR, this means that each worker you employ will increase total output to more than the previous one. After a while marginal product (the gain in product for every new worker you employ) will start to decrease until the point in which it becomes negative, this is when the law of diminishing returns kicks in.
Basically each new worker you are employing once the law of diminishing returns kicks in will produce less than the last, this can be explained by things like a lack of capital equipment avaliable for the amount of workers, hence the term 'too many cooks spoil the broth.'
It can be shown by the average cost diagram, the shape of the average variable or marginal cost curves explain it, as the curves start to go upwards, this is the increase in costs from employing more workers matched with the lower marginal product each new worker has.