Question

What are diminishing marginal returns?

Short answer

Diminishing marginal returns is an economic concept where each additional unit of input employed in the production process generates a lower marginal output after a certain point. This occurs due to various factors, such as overcrowding or limited resources. Understanding this phenomenon is essential for analyzing production efficiency and effective resource allocation.

Step-by-step solution

Definition

Diminishing marginal returns refers to the phenomenon where, after a certain point, each additional unit of input employed in the production process (e.g., labor, raw materials, etc.), generates a lower marginal output. In other words, when you keep increasing the amount of input, the increase in output gets smaller and smaller with each additional unit of input.

Example: Produce Production

Consider the scenario where a farmer is using workers to pick apples from an orchard. To analyze the situation, let's look at the total output (number of apples picked) for different inputs (number of workers employed).

Identify the point of diminishing marginal returns

The point at which diminishing marginal returns occurs is where the addition of a new worker creates a lesser output than the additional worker prior. In the apple-picking example, say we have the following information: Workers: 1 Apples picked: 50 Workers: 2 Apples picked: 110 Workers: 3 Apples picked: 155 Workers: 4 Apples picked: 180 In this case, the second worker adds 60 apples to the total output, the third worker adds 45 apples, and the fourth worker adds just 25 apples. This indicates that we have reached the point of diminishing marginal returns, as each additional worker adds less output than the worker before them.

Graph the relationship

To better illustrate the concept of diminishing marginal returns, it can be helpful to graph the relationship between the number of workers and the total output of apples picked. On the X-axis, we have workers, and on the Y-axis, the total output. In this case, the graph will look like an upward-sloping curve that gradually becomes less steep as the number of workers increases, demonstrating the diminishing effects on total output, caused by additional input.

Understand the reasons behind diminishing marginal returns

Diminishing marginal returns are a result of several factors, which mainly depend on the given context. In our apple-picking example, diminishing marginal returns may occur due to factors such as overcrowding in the field, limited apple supply, and/or communication challenges among workers. In conclusion, diminishing marginal returns is an economic concept where, after a certain point, each additional unit of input in the production process results in lower marginal outputs. It is essential to understand this concept when analyzing production efficiency and ensuring that resources are used effectively.