Law of Diminishing return MCQ Free PDF Objective Question Answer for Law of Diminishing return Quiz Download Now!

However, after a certain output, a firm may experience diseconomies of scale. This law only applies in the short run because, in the long run, all factors are variable. Therefore, the organization needs to increase the number of workers. In case, the organization is in stage III; it implies that the organization needs to reduce number of workers.

  • Here, the rate of growth of the overall product is decreasing.
  • In order to maximize production, she hires twice as many farm hands to help with planting and harvesting.
  • Production theory is the study of the economic process of converting inputs into outputs.
  • Total Product – When an input is applied through a process, the total product is the result or outcome as an aggregate measure.

The law of diminishing returns, otherwise known as the law of variable proportion is important because it helps the producer to determine the best proportion in which to combine the fixed and variable inputs. If the MP is increasing it means there is too much of the fixed input in combination with the variable input. If the MP falls to zero, there is too little of the fixed input. This guides the producer in determining the best proportion between the fixed and variable inputs.

Latest Law of Diminishing return MCQ Objective Questions

If the produce increased proportionate to the increase in the doses of labour and capital, the food problem of the whole country would be solved from a tingle plot of land. The return becomes less than proportionate despite the application of more and more labour and capital. If the variable factor of production is increased (e.g. labor), there comes a point where it will become less productive and therefore there will eventually be a decreasing marginal and then average product.

Returns eventually diminish because economists measure productivity with regard to additional units . Additional inputs significantly impact efficiency or returns more in the initial stages. The point in the process before returns begin to diminish is considered the optimal level. Being able to recognize this point is beneficial, as other variables in the production function can be altered rather than continually increasing labor. If the perfect adjustment of the factors of production has been made, certainly optimum production will be returned. After this optimum level of production, more and more variable factors will result in less efficient combination of fixed as well as variable factors of production.

In such instances, an increase in some factors of production without a corresponding increase in others will disturb the balance of the factors, making it impossible for production to be increased at increasing rates. The total product curve shows the change in production with progressive increase in one production input. A good example of diminishing returns includes the use of chemical fertilisers- a small quantity leads to a big increase in output. However, increasing its use further may lead to declining Marginal Product as the efficacy of the chemical declines. If the factory, increases capital, we can get a different outcome, shown by SRAC2.

In order to increase productivity, the owners decide to hire additional workers for the lunch shift. However, once the additional workers are in place, it is too crowded. The wait staff are bumping into each other, and the dishwashers are cramped and working slower than usual.

[PDF Notes] Law of Diminishing Return. Why does the law operate? [Latest]

The second derivative is the change in the difference of the return function. With the return function here, producing more than ten units does not increase the law of diminishing returns termed as the second derivative so it would not be beneficial to work past this point. This data could also be graphed rather than displayed in a table.

the law of diminishing returns termed as

Clinical trials are mostly conducted in hospitals and similar medical centers. Over the period 1970–90, a day of hospitalization costs in the US rose at an average rate of 11% per year – nearly twice the rate at which the GDP price index was increasing. It seems reasonable to assume that in-hospital test costs rose commensurately. Distinguishing between the power and exponential functions is not just an esoteric exercise in equation fitting.


Approximately 45t of seahorses are consumed in China per year – roughly 16 million animals. Seahorse populations throughout the world are being decimated to supply this ever-increasing demand, and international trade is now carefully regulated. Diminishing returns to scale ensure that the size of the productive firms cannot be infinitely large.

However, after many months of this the factory needs to find more storage for the additional metal. The additional resources start to overtake the factory and reduce the area available for working. This decreases the total number of toys that can be made, a negative return. While the diminishing returns definition was met with the small increase, over time this became more dramatic and eventually caused a large impact on production. The law of diminishing returns is also known as diminishing returns, the principle of diminishing marginal productivity, and diminishing marginal returns. Diminishing returns begin at the point when the proportion of all the other inputs falls relative to the input that is changed.

the law of diminishing returns termed as

In this sense, while the hiring of two additional workers resulted in diminishing returns, it also resulted in greater profits. Once it gets to the point of diminishing marginal returns, increasing an additional chef will increase your production costs without a proportional increase in pizza production. It is a law that describes the behaviour of the Marginal Product . Therefore, it is the MP that eventually diminishes and it does so only after increasing. When fixed and variable inputs are combined to produce a product, the fixed input helps the variable input .

It is due to this reason that the law of diminishing returns apply quickly to agriculture. In manufacturing industries, the application of the law is delayed. They believe that the law applies because one factor is fixed. This fixed nature of the factor can be found in any field of production whether agriculture, industry or any other. If certain factor becomes fixed, the adjustment of factor of production will be disturbed and the production will not increase at increasing rates and thus law of diminishing returns will apply. The law of diminishing marginal productivity states that input cost advantages typically diminish marginally as production levels increase.

Scarce Factors

There is a lot of empirical analysis behind the law of diminishing returns. Managers also use the law of diminishing marginal returns to determine the optimum number of employees required for maximum productivity. If an organization finds itself in Stage One of production, it means that the capital is not being utilized to the maximum, so the solution is to increase the number of employees. If the organization is in Stage Two, the manager can work out the optimum number of employees and the maximum level of productivity the organization is capable of achieving. If the organization is in Stage Three of production, then it means that the organization needs to reduce the number of employees. Sometimes, the law of diminishing marginal returns applies because no perfect substitute can be found to replace one of the factors of production.

For instance, holding other factors constant, increasing the number of chefs in your pizza outlet will increase pizza production up to a certain point. The variable input may be any factor usually used in production (e.g. labour). To address this problem, a marketing department should evaluate and adjust other variables, such as its chosen channels or its approach to social media monitoring and analytics. Best combination of factors of production has crossed the level of optimum point. In this case the law also applies to societies – the opportunity cost of producing a single unit of a good generally increases as a society attempts to produce more of that good.

We have all been to a café where they consistently seem slammed with customers in the mornings and wonder why they don’t schedule more employees for that shift. Assuming the café cannot increase in size to serve the customers, it has to rely on operating at an efficient point given the input factors that can be easily adjusted. In this case, the input factor that can change in the short run is labor.

A cafe may wish to serve more customers during the busy summer months. However, employing extra workers may be difficult because of a lack of space in the cafe. Studies among employers point, for example, to the fact that growing expectations as regards soft skills do not necessarily imply that the cognitive domain of knowledge becomes less important.

Diminishing returns

The law of diminishing returns only applies if one input was increased, not all. The marginal product produced by the 11th unit of labor is less than the 10th. Malthus and Ricardo, writing in the early decades of that century, both worried about England’s population relative to the amount of food and other goods that could be produced in the country. Malthus believed that England’s population was growing faster than its capacity to produce food and that the end result would be a nightmarish catastrophe. Ricardo did not agree entirely with Malthus’s doomsday predictions, but he also noted that increased inputs did not always result in proportional increases in output. Malthus, Ricardo, and economists that came after established the idea that, as population expanded, the output per person would inevitably decline.

As more and more minerals are extracted from the mines, the levels of minerals go down. For deep extraction, there is need of light, oxygen, water, more labourers etc. All this would involve more expenses and hence the law of diminishing returns would operate quickly. All units of variable factors of production are assumed to be homogeneous. Beyond the optimum capital-labor ratio, there would be no effect of an increased labor on the productivity of labor because labor can substitute capital to a limited extent. This leads to an increase in the number of workers to compensate the decrease in capital and capital-labor ratio.

3 units of labour and capital are shown on OX-axis and average cost on OY-axis. At every successive unit, average cost increases from 8 to 10, 12 and 14.5. Therefore, upward slope of IC curve reflects increasing cost. Refers to the stages in which the total product starts declining with an increase in number of workers. As shown in Table-3, the total output reaches to maximum level at the twentieth worker. When the total output initially increases with an increase in changing input at a given quantity of fixed data, but it starts decreasing after a point of time, illustrates the law of Diminishing Returns.