The short run is a period of time where at least one factor of production is assumed to be in fixed supply. Usually the quantity of capital inputsis fixed andproduction can be altered by suppliers through changing the demand for variable inputs such as labour, components, raw materials and energy inputs. Often the amount of land available for production is also fixed.
In the short run, the law of diminishing returns states that as more units of a variable input (i.e. labour or raw materials) are added to fixed amounts of land and capital, the change in total output will at first rise and then fall. Diminishing returns to labour occurs when marginal product of labour starts to fall. This means that total output will still be rising – but increasing at a decreasing rate as more workers are employed eventually a decline in marginal product leads to a fall in average product.
What happens to marginal product is linked directly to the productivity of each extra worker employed. At low levels of labour input, the fixed factors of production - land and capital, tend to be under-utilised which means that each additional worker will have plenty of capital to use and, as a result, marginal product may rise.
Comments
No comments have yet been made