4.1.4.3 The law of diminishing marginal returns

Draw short run cost curves for MC, ATC, AVC, AFC

The cost curves are U shaped because of diminishing marginal returns.

Total returns

Total output produced by a number of units of factors over a period of time.

The law of diminishing marginal returns

As extra units of a variable factor are adding to a fixed factor, the output from each additional unit of the variable factor will eventually decrease. This can also show how productive a certain number of workers are. (Total output still rises but at a slower rate).

Diminishing marginal returns diagram for MR AR and TR

As marginal returns decrease, the gradient of total returns begins to level off. When marginal returns becomes negative, the gradient of total returns is negative. When marginal returns is greater than average returns, average returns are increasing.

Average returns

Average output per unit of input over time. eg output/number of workers.

Marginal returns

The additional quantity of output produced by adding one extra unit of the variable resource employed eg labour.