![]() At this point production demonstrates diminishing returns. We divide the factors of production into the following four categories: Land, Labor, Capital, and Enterprise. The 7 th worker supplies 26 units and the 8 th worker just 20 added units. the 4 th worker adds 26 to output and the 5 th worker adds 28 and the 6 th worker increases output by 29. Initially, marginal product is rising – e.g.In the following numerical example, we assume that there is a fixed supply of capital (capital = 20 units) to which extra units of labour are added to the production process. One explanation is that, beyond a certain point, new workers will not have as much capital equipment to work with so it becomes diluted among a larger workforce I.e., there is less capital per worker. What might cause marginal product to fall? This means that total output will be increasing at a decreasing rate Diminishing returns to labour occurs when marginal product of labour starts to fall.In the short run, the law of diminishing returns states that as more units of a variable input are added to fixed amounts of land and capital, the change in total output will first rise and then fall.We assume that the quantity of plant and machinery is fixed and that production can be altered by changing variable inputs such as labour, raw materials and energy.A business has chosen its scale of production and sticks with this in the short run.The short run is a time period where at least one factor of production is in fixed supply.This is something the UK government has to consider as it reviews our future sources of energy. In the nuclear power industry for example, it can take many years to commission new nuclear power plant and capacity. The length of time required for the long run varies from sector to sector. ![]() Marginal product is 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. In service or knowledge industries, where output is less “tangible" it is harder to measure productivity.Īverage product measures output per-worker-employed or output-per-unit of capital. In manufacturing industries such as motor vehicles, it is straightforward to measure how much output is being produced. We use three measures of production and productivity:
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