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The law of diminishing marginal returns says that all short-run production processes in the world work the same way: as you add more and more workers (variable resources) to use a fixed resource, eventually the workers’ MPP starts to get smaller. More formally, the law of diminishing returns states that when successive equal amounts of a variable resource are combined with a fixed amount of another resource, there is a point beyond which the extra or marginal product that can be attributed to each additional unit of the variable resource declines.
In short run, diminishing marginal returns are encountered because at least one resource is fixed. It is impossible to increase all resources proportionally; capital and land per worker fall as more workers are hired, inevitably leading to diminishing additions of output as extra labor is hired. ... In this range, the marginal and average products of labor both grow. ... In this range, average product continues to climb up, but marginal productivity diminishes. Once marginal product falls below average product, average product begins to fall. However, the total product continues to rise to its maximum where the marginal product becomes zero. ...
Several relationships between the Total Product, Average Product and Marginal Product curves can be noticed in above panels.
In the first region labeled “increasing returns”, up to the Inflection point, the slope of Total Product is increasing at an increasing rate: because the MP curve measures the slope of the TP curve, in other words, MP=dQ/dL, the Marginal Product curve is increasing up to Inflection point.
In the region labeled “ decreasing returns”, right after Inflection point up to Maximum point, the slope of TP, which is Marginal Product curve, is decreasing, and Total product is increasing at a decreasing rate.
At the point where Total product reaches its maximum the slope of TP, Marginal Product, is equal to zero.
After Maximum point, in the region labeled “negative returns”, the Total Product function is decreasing, and the MP curve continues decreasing and becomes negative. ...
Another thing which can be seen from the diagram, is that when Marginal product exceeds Average product (MP>AP), Average product is increasing; when MP
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