Question

Why is it that, in the short-run, after a certain number of workers has been hired, output increases by less and less with each additional worker hired? Illustrate your answer with an example.

Would there be any circumstances under which this phenomenon would not occur?

Answer 1

Output is produced with the help of inputs like labour , land . In the short run, some of the factors are fixed and some of the factors are variable. Output is produced with the help of combination of fixed and variable factor. Till the time both fixed and variable factors are use in efficient combination output increase but when more of variable factor is used on fixed factor, marginal productivity falls and output starts increasing at decreasing returns. It means law of diminishing returns applies. It means that due to change in the factor ratio law of diminishing returns apply.

Example of law of diminishing returns- Main cause of diminishing return on production is one of the factor is fixed and others are variable. When this variable factor is used with fixed factor , their ratio compared to the variable factor falls. When an additional unit of variable factor has to produce with relatively less units of fixed factors then marginal return of variable factor starts to diminish .

For example, in a field measuring 10 hectares, 5 labors are employed. Land is fully utilized with the help of 5 labors. In this land labor ratio is 2:1. If the number of laborers increased to 10 then land labor ratio will be 1:1. Then it is clear that 1 labor on one hectare of land will produce less than 2 labor on 1 hectare of land. Thus, marginal production of laborers diminish.