A company gets less and less extra output from an additional unit of input, ceteris paribus, because of… a) the total product is increasing. b) the marginal product increasing. c) the Law of Increasing Returns. d) the Law of Diminishing Returns.
The correct answer and explanation is:
The correct answer is d) the Law of Diminishing Returns.
The Law of Diminishing Returns, also known as the Law of Variable Proportions, states that as more units of a variable input (such as labor) are added to a fixed input (such as machinery or land), the additional output (marginal product) from each additional unit of input will eventually decrease, assuming all other factors remain constant (ceteris paribus).
At the beginning of production, when few units of the variable input are used, the output may increase significantly as more labor or resources are added. This is known as increasing returns. However, as the variable input continues to increase, each additional unit contributes less to overall production. This diminishing extra output is the core of the law.
The law applies to most production processes and is a key concept in microeconomics. Initially, adding more labor can lead to greater efficiency and higher output as workers specialize and make better use of the fixed resources. But beyond a certain point, workers may become less efficient due to overcrowding, competition for resources, or limited equipment. As a result, the marginal product of each additional worker or input declines.
This diminishing return effect can be observed in many industries, from agriculture (where adding more workers to the same plot of land leads to lower productivity per worker) to manufacturing (where adding more workers without enough machinery or workspace results in less output per worker).
In summary, the Law of Diminishing Returns explains why adding more input to a fixed amount of other resources leads to progressively smaller increases in output, which is a fundamental principle in production economics.