Question

What are diminishing marginal returns as they relate to costs?

Short answer

Diminishing marginal returns implies that marginal productivity resulting from employing additional units of a factor of production subsequently diminishes as output increases. This diminishing marginal return is associated with a diminishing cost advantage in production.

Step-by-step solution

Step 1. Diminishing marginal returns

Marginal returns refer to the additional return obtained with an additional output produced by employing an additional unit of the variable input (labor). This marginal productivity or marginal return diminishes as output expands with the utilization of subsequent additional workers or advantage over a factor of production. This is called the law of diminishing marginal returns.

Step 2. Diminishing marginal returns and costs of production

Productivity comes from the factors of production used in the production process. In the short run, the only variable factor is labor. As the number of labor increases, output or total product also increases. As total product increases, the marginal product also increases but up to a certain level of labor employed. After that, the law of diminishing returns operates and the marginal product starts falling, that is, marginal returns to productivity diminishes as more and more workers are employed. It implies that marginal returns over the cost advantage diminishes. Though the cost of production increases with the increase in workers, marginal returns diminish as output increases.