The law of diminishing returns characterizes the behavior of costs. Change in the volume and costs of production in the short run

Within a short period of time, the firm can combine fixed capacities with varying amounts of other inputs. In what way does the volume of production change in this case with the use of different amounts of resources? To this question in general view The answer is the law of diminishing returns.

The law of diminishing returns is that in a short period, when the value production capacity is fixed, the marginal productivity of a variable factor will decrease starting from a certain level of costs of this variable factor.

The marginal product (productivity) of a variable factor of production, such as labor, is the increase in output resulting from the use of an additional unit of this factor.

The law of diminishing returns can be represented by the example of a small carpentry workshop for the manufacture of furniture. The workshop has a certain amount of equipment - turning and planing machines, saws, etc. If this firm were limited to just one or two workers, then the total output and labor productivity per worker would be very low. These workers would have to perform several labor tasks, and the advantages of specialization and division of labor could not be realized. In addition, a significant part of the working time would be wasted when the worker moves from one operation to another, preparing the workplace, etc., and the machines would simply be idle most of the time.
The workshop would be understaffed, machines would be underused, and production would be inefficient due to the excess of capital relative to the amount of labor. These difficulties would disappear as the number of workers increased. As a result of such changes, time losses during the transition from one operation to another would be eliminated. Thus, as the number of workers able to fill vacancies increases, the additional or marginal product produced by each successive worker will tend to increase due to the increase in production efficiency. However, such a process cannot be endless. A further increase in the number of workers creates a problem of their surplus, that is, workers will underutilize their work time. Under these conditions, there will be more labor in the workplace in proportion to the unchanged value of capital funds, i.e. machines, machine tools, etc. The total volume of production will begin to grow at a slower pace. This is the main content of the law of diminishing returns of the means of production (see Table 5.2).

The table shows how, with a change in the number of workers from 1 person to 9, the average labor productivity per 1 worker changes from 10 units to 6.8 units of production with a change in the total volume of production from 10 to 63. With a decrease in the volume of production to 62 units, there is negative ultimate return used labor resources, that is, when 9 people work at this company.
A graphic representation of the law of diminishing returns is shown in Figure 5.3.

As you join more variable resources (labor) to a constant amount of constant resources (in this case we are talking about machine tools, machines, etc.), the volume of production received from the activities of workers will first increase at a decreasing rate (15, 12, 10, etc. units according to Table 5.2.), then it will reach its maximum (63 units of the total volume), after which it will begin to decrease, dropping to 62 units.

Law of diminishing returns

Within a short period of time, a firm can combine fixed capacities with varying amounts of other inputs. In what way does the volume of production change in this case with the use of different amounts of resources? This question is generally answered by the law of diminishing returns.

The law of diminishing returns states that in the short run, when the amount of production capacity is fixed, the marginal productivity of a variable factor will decrease starting from a certain level of input of this variable factor.

The marginal product (productivity) of a variable factor of production, such as labor, is the increase in output resulting from the use of an additional unit of this factor.

The law of diminishing returns can be represented by the example of a small carpentry workshop for the manufacture of furniture. The workshop has a certain amount of equipment - lathes and planers, saws, etc. If this firm were limited to just one or two workers, then the total output and labor productivity per worker would be very low. These workers would have to perform several labor tasks, and the advantages of specialization and division of labor could not be realized. In addition, a significant part of the working time would be wasted when the worker moves from one operation to another, preparing the workplace, etc., and the machines would simply be idle most of the time.
The workshop would be understaffed, machines would be underused, and production would be inefficient due to the excess of capital relative to the amount of labor. These difficulties would disappear as the number of workers increased. As a result of such changes, time losses during the transition from one operation to another would be eliminated. Thus, as the number of workers able to fill vacancies increases, the additional or marginal product produced by each successive worker will tend to increase due to the increase in production efficiency. However, such a process cannot be endless. A further increase in the number of workers creates the problem of their surplus, that is, the workers will underutilize their working time. Under these conditions, there will be more labor in the workplace in proportion to the unchanged value of capital funds, i.e. machines, machine tools, etc. The total volume of production will begin to grow at a slower pace. This is the main content of the law of diminishing returns of the means of production (see Table 5.2).

The table shows how, with a change in the number of workers from 1 person to 9, the average labor productivity per 1 worker changes from 10 units to 6.8 units of production with a change in the total volume of production from 10 to 63. With a decrease in the volume of production to 62 units, there is the negative marginal return of the labor resources used, that is, when 9 people work in this firm.
A graphic representation of the law of diminishing returns is shown in Figure 5.3.

As more and more variable resources (labor) are added to a constant amount of constant resources (in this case, we are talking about machine tools, machines, etc.), the volume of production received from the activities of workers will first increase at a decreasing rate (15, 12, 10 etc. units according to Table 5.2.), then it will reach its maximum (63 units of the total volume), after which it will begin to decrease, dropping to 62 units.

The Law of Diminishing Marginal Returns of Factors of Production

The possibilities of using labor and capital in the production process are not the same. If the demand for the firm's products grows, then at first the increase in production is achieved by additional attraction of labor to the same production facilities, since it takes more time to increase the latter. Hence the concept of short-term and long-term periods of production.

The short run is a period that is too short for an enterprise to change its production capacity, but long enough for a change in the degree of intensity of use of these fixed capacities.

AT short term labor is considered a variable factor, and capital - a constant factor. In this case, we can distinguish the total, average and marginal product of the variable factor.

Total product (Q) is the total output obtained using a given variable factor.

Average product (AP) is the ratio of total output to total variables used.

Marginal product (MP) is the increase in total output with an increase in the variable factor by one unit.

where MP L is the marginal product of labor;

ΔL is the change in the amount of labor;

ΔQ is the change in the amount of capital.

Starting from a certain point in time, the successive addition of units of a variable factor (for example, labor) to an unchanged, fixed resource (for example, capital or land) gives a decreasing additional, or marginal product per each subsequent unit of the variable resource. This relationship is called the law of diminishing returns.

Table 11

Numerical illustration of the law of diminishing returns

The table shows a numerical illustration of the law of diminishing returns. The arrival of the first two workers is accompanied by increasing returns, since their marginal products are 10 and 15, respectively. Then, starting from the third worker, the marginal product successively decreases and for the eighth worker it is reduced to zero, and for the ninth it acquires a negative value.

The dynamics of gross output, marginal and average products, depending on the change in the variable factor, can be represented graphically
(Fig. 5.1.).

Zone 1 - Marginal product grows and reaches a maximum, respectively, the average and total product also increase;

Zone 2 - Marginal product begins to decline while the average product continues to rise, eventually reaching its maximum. The total product also increases because the marginal product is still positive.

Zone 3 - Marginal product continues to decrease, but it is still positive: the total product is still increasing. As soon as marginal product becomes zero, total output reaches a maximum. The average product begins to decline, albeit at a slower rate than the marginal product.

Zone 4 - Marginal product becomes negative, average and total product decrease.

Rice. 5.1. Gross output, marginal and average product

Zone 4 is of no interest to the rational entrepreneur, since the additional use of a variable resource only reduces output.

Zones 1 and 2 are inefficient due to the imbalance between variable and fixed resources while underutilizing the former.

Zone 3 is optimal from the point of view of overall efficiency. Despite the fact that the efficiency of a variable resource is decreasing, an increase in its use contributes to an increase in the return on a constant factor and leads to an increase in overall efficiency.

The relationship between total, average and marginal products is expressed in the following terms:

1) with an increase in the variable factor, the total product always increases if the values ​​of the marginal product are positive, and decreases if the values ​​of the marginal product are negative;

2) total product reaches its maximum when marginal product zero;

3) the average product of the variable factor grows as long as its values ​​are below the values ​​of the marginal product, and decreases if they are above the values ​​of the marginal product;

4) in the case of equality of the values ​​of the average and marginal products, the average product reaches its maximum.

Long run - a period of time long enough to change the amount of all resources employed, including production capacity.

The long-run production function is to determine the optimal combination of factors that will provide the maximum output for a given number of factors.

Having plotted along the X and Y axes the amount of labor used (on the OX axis) and capital (on the OY axis), on the coordinate plane we mark the points at which the firm has the same output. By connecting the points with one line, we get a curve called an isoquant.

Isoquant (iso - equal, quantum - quantity, that is, a line of equal product) - a curve showing all combinations of two factors of production in which the volume of output is the same.

Rice. 5.2. isoquant

Properties of isoquants:

1) the isoquant, located above and to the right of the other, corresponds to a larger output;

2) the isoquant has a negative slope;

3) isoquants are convex to the origin. It is related to the decline marginal norm technological replacement.

If the firm's budget is known, as well as the prices of units of labor and capital, then, by analogy with the budget line, it is possible to construct a line of identical costs for the firm - the isocost.

Isocost (line of equal costs) - reflects all combinations of labor and capital, in which the total costs of the firm remain the same. Isocost - both the line of equal costs and the line budget constraint firms.

Rice. 5.3. Isocost

Let's combine the isocost and isoquant on the same graph.

Only at the point of contact of the isocost with the corresponding isoquant, the firm produces the volume of products with minimal costs. This point is called the point of optimal combination of resources.

MP K / P K = MP L / P L

Cost minimization rule

The optimal combination of factors used in the production process is achieved when the last ruble spent on the purchase of each factor gives the same increase in total output.

From a rational point of view economic behavior, this means that a relatively more expensive factor of production is replaced by a relatively cheaper one.

So, if MP L / P L > MP K / P K , then the firm minimizes its costs by replacing capital with labor. During this replacement, the marginal product of labor will decrease and the marginal product of capital will increase. The substitution will be carried out until the equality of the factors weighted at the corresponding prices of the marginal products is achieved. Conversely, if MP L / P L< MP K / P K , то фирме следует замещать труд капиталом для достижения равенства.

In the long run, you can't talk about the productivity of any one factor, but you can talk about returns to scale. With an increase in the same proportion of all production factors, the efficiency of production can increase, remain unchanged or decrease, which is expressed in the nature of the scale.

Three cases are possible:

Increasing returns to scale - when all factors of production increase by n times, output increases by more than n times.

Diminishing returns to scale - when all factors of production increase by a factor of n, output increases by less than n times.

Constant returns to scale - when all factors of production increase by n times, output also increases by n times.

The factors of production must be used by the firm with a certain proportionality between fixed and variable factors. It is impossible to arbitrarily increase the number of variable factors per unit of a constant factor, since in this case law of diminishing returns(see 2.3).

In accordance with this law, a continuous increase in the use of one variable resource, combined with an unchanged amount of other resources, at a certain stage will lead to the cessation of the growth of returns, and then to its decrease. Often the operation of the law assumes the invariance of the technological level of production, and therefore the transition to a more advanced technology can increase returns regardless of the ratio of constant and variable factors.

Let us consider in more detail how the return on a variable factor (resource) changes in a short-term time interval, when part of the resources or factors of production remains constant. Indeed, for a short period, as already noted, the company cannot change the scale of production, build new workshops, purchase new equipment, etc.

Assume that the company in its activities uses only one variable resource - labor, the return of which is productivity. How will the costs of the firm change with a gradual increase in the number of hired workers? First, consider how output will change with an increase in the number of workers. As the equipment is loaded, production increases rapidly, then the increase gradually slows down until there are enough workers to fully load the equipment. If you continue to hire workers, they will not be able to add anything to the volume of output. In the end, there will be so many workers that they will interfere with each other, and output will decrease.

See also:

Within a short period of time, the firm can combine fixed capacities with varying amounts of other inputs. In what way does the volume of production change in this case with the use of different amounts of resources? This question is generally answered by the law of diminishing returns.

The law of diminishing returns states that in the short run, when the amount of production capacity is fixed, the marginal productivity of a variable factor will decrease starting from a certain level of input of this variable factor.

The marginal product (productivity) of a variable factor of production, such as labor, is the increase in output resulting from the use of an additional unit of this factor.

The law of diminishing returns can be represented by the example of a small carpentry workshop for the manufacture of furniture. The workshop has a certain amount of equipment - turning and planing machines, saws, etc. If this firm were limited to just one or two workers, then the total output and labor productivity per worker would be very low. These workers would have to perform several labor tasks, and the advantages of specialization and division of labor could not be realized. In addition, a significant part of the working time would be wasted when the worker moves from one operation to another, preparing the workplace, etc., and the machines would simply be idle most of the time.
The workshop would be understaffed, machines would be underutilized, and production would be inefficient due to an excess of capital relative to the amount of labor. These difficulties would disappear as the number of workers increased. As a result of such changes, time losses during the transition from one operation to another would be eliminated. Thus, as the number of workers able to fill vacancies increases, the additional or marginal product produced by each successive worker will tend to increase due to the increase in production efficiency. However, such a process cannot be endless. A further increase in the number of workers creates the problem of their surplus, that is, the workers will underutilize their working time. Under these conditions, there will be more labor in the workplace in proportion to the unchanged value of capital funds, i.e. machines, machine tools, etc. The total volume of production will begin to grow at a slower pace. This is the main content of the law of diminishing returns of the means of production (see Table 5.2).

The table shows how, with a change in the number of workers from 1 person to 9, the average labor productivity per 1 worker changes from 10 units to 6.8 units of production with a change in the total volume of production from 10 to 63. With a decrease in the volume of production to 62 units, there is the negative marginal return of the labor resources used, that is, when 9 people work in this firm.
A graphic representation of the law of diminishing returns is shown in Figure 5.3.

As more and more variable resources (labor) are added to a constant amount of constant resources (in this case, we are talking about machine tools, machines, etc.), the volume of production received from the activities of workers will first increase at a decreasing rate (15, 12, 10 etc. units according to Table 5.2.), then it will reach its maximum (63 units of the total volume), after which it will begin to decrease, dropping to 62 units.