The law of diminishing returns and returns to scale

Three measures of production and productivity

1. Total product. 2. Average product. 3. Marginal product.

Long run

A time period where all of the factors of production are variable.

Short run

A time period where at least one factor of production is fixed.

Constant marginal returns

Marginal product is constant. The rate of change of total product is decreasing.

Diminishing marginal returns.

Marginal product is decreasing, and the rate of change of total product continues to decrease.

Increasing marginal returns

Marginal product is increasing. Total product is also increasing.

Negative marginal returns.

Marginal product is negative, leading to a decrease in total product.

Average product.

Measures output per-worker employed, or output per-unit of capital.

The Law of Diminishing Returns

Occurs in the short-run when marginal product is falling, and marginal cost is rising. Total product is increasing at a decreasing rate.

Marginal product

The change in output from increasing the number of workers used by one person, or by adding one more machine to the production process in the short-run.

Returns to scale

The technical relationship of how the output of a business responds to a change in factor inputs.

Total product.

Total output produced. In manufacturing industries, this is easy to measure. However, in the service/knowledge industries, this can be difficult, where output is less tangible.

Decreasing returns to scale

When % change in output < % change in inputs (diseconomies of scale).

Constant returns to scale

When % change in output = % change in inputs (no economies/diseconomies of scale).

Increasing returns to scale

When % change in output > % change in inputs (economies of scale).

Economies of scale

When factor inputs increase, so does output, leading to a fall in the unit cost of production (average cost).