Diminishing marginal returns - Estate Agent's Examination Part 1&2

Q.
a) In the short-run, all production process will be subjected to the law of diminishing marginal returns. Using graph and table, illustrate this law.

(20 marks, 2012 Q3a)

A.
a) The Law of Diminishing Margin Returns.

Definition of 'Law of Diminishing Marginal Returns'

"A law of economics stating that, as the number of new employees increases, the marginal product of an additional employee will at some point be less than the marginal product of the previous employee."

Investopedia on "Diminishing marginal returns"

For example, the use of fertilizer improves crop production on farms and in gardens; but at some point, adding more and more fertilizer improves the yield less per unit of fertilizer, and excessive quantities can even reduce the yield.

A common sort of example is adding more workers to a job, such as assembling a car on a factory floor. At some point, adding more workers causes problems such as workers getting in each other's way or frequently finding themselves waiting for access to a part. In all of these processes, producing one more unit of output per unit of time will eventually cost increasingly more, due to inputs being used less and less effectively.[2]

Wikipedia on "Diminishing Marginal Returns"

An extract from Web-book.com, Rittenberg & Tregarthen, 2014.

Figure 8.2. From Total Product to the Average and Marginal Product of Labor

The first two rows of the table give the values for quantities of labor and total product from Figure 8.1, “Acme Clothing’s Total Product Curve”. Marginal product, given in the third row, is the change in output resulting from a one-unit increase in labor. Average product, given in the fourth row, is output per unit of labor. Panel (a) shows the total product curve. The slope of the total product curve is marginal product, which is plotted in Panel (b). Values for marginal product are plotted at the midpoints of the intervals. Average product rises and falls. Where marginal product is above average product, average product rises. Where marginal product is below average product, average product falls. The marginal product curve intersects the average product curve at the maximum point on the average product curve.

Ref:

Libby Rittenberg and Timothy Tregarthen. 2014. Principles of Microeconomics. Chapter 8.1 Production Choices and Costs: The Short Run at http://www.web-books.com/eLibrary/ON/B0/B63/041MB63.html