|
In economics, diminishing returns is the short form of diminishing marginal returns. In a production system, having fixed and variable inputs, keeping the fixed inputs constant, as more of a variable input is applied, each additional unit of input yields less and less additional output. This concept is also known as the law of increasing opportunity cost or the law of diminishing returns. Economics (from the Greek οίκος [oikos], house, and νομος [nomos], rule, hence household management) is a social science that studies the production, distribution, trade and consumption of goods and services. ...
A simple example
Suppose that one kilogram (kg) of seed applied to a plot of land of a fixed size produces one tonne of harvestable crop. You might expect that an additional kilogram of seed would produce an additional tonne of output. However, if there are diminishing marginal returns, that additional kilogram will produce less than one additional tonne of harvestable crop (on the same land, during the same growing season, and with nothing else but the amount of seeds planted changing). For example, the second kilogram of seed may only produce a half tonne of extra output. And diminishing marginal returns also implies that a third kilogram of seed will produce an additional crop that is even less than a half tonne of additional output. Assume that it is one quarter of a tonne.
In economics, the term "marginal" is used to mean on the edge of productivity in a production system. The difference in the investment of seed in these three scenarios is one kilogram — "marginal investment in seed is one kilogram". And the difference in output, the crops, is one tonne for the first kilogram of seeds, a half tonne for the second kilogram, and one quarter of a tonne for the third kilogram. Thus, the marginal physical product (MPP) of the seed will fall as the total amount of seed planted rises. In this example, the marginal product (or return) equals the extra amount of crop produced divided by the extra amount of seeds planted. In economics, the marginal product or marginal physical product of an input to production during a specific time period is as follows, assuming that no other inputs to production change: marginal product of X used in producing Y = ΔY/ΔX = (the change of Y)/(the change of X). ...
A consequence of diminishing marginal returns is that as total investment increases, the total return on investment as a proportion of the total investment (the average product or return) also decreases. The return from investing the first kilogram is 1 t/kg. The total return when 2 kg of seed are invested is 1.5/2 = 0.75 t/kg, while the total return when 3 kg are invested is 1.75/3 = 0.58 t/kg.
A law? The "law" of diminishing marginal returns says that after a possible initial increase in marginal returns, the MPP of an input will fall as the total amount of the input rises (holding all other inputs constant). The "law" is far from universal in its validity, though there are many examples.
For example, most people find that listening to the same piece of music over and over again during a day implies that each additional hearing is less pleasant than the previous one, at least after the initial stage of gaining familiarity with the piece. This is an example of diminishing marginal utility of the piece. (Case & Fair, 1999: pp. 135-137). In economics, marginal utility is the additional utility (satisfaction or benefit) that a consumer derives from an additional unit of a commodity or service. ...
The usual argument in favor of diminishing marginal physical returns is in terms of crowding: if you put too many seeds (or too much fertilizer) in the ground, eventually each additional increment pays off less than previous ones.
Returns and costs There is an inverse relationship between returns of inputs and the cost of production. Suppose that a kilogram of seed costs one euro (€), and this price does not change. There are also other costs, but assume they do not vary with the amount of output. (They are fixed costs.) That means that the first ton of the crop cost one extra € to produce. That is, for the first ton of output, the marginal cost (MC) of the output is 1 €/t. If there are no other changes, then if the second kg of seeds applied to land produces only 1/2 extra ton of output, the MC equals 1 € per 1/2 t of output, or 2 € per ton. Similarly, if the third kilogram produces 1/4 extra ton, then the MC equals 1 € per 1/4 ton, or 4 € per ton. Thus, diminishing marginal returns imply increasing marginal costs. This also implies rising average costs. In this numerical example, average cost rises from 1 € for 1 ton to 2 € for 1.5 tons to 3 € for 1.75 tons, or from 1 to 1.333 to 1.71 € per ton (approximately). Fixed costs are expenses whose total does not change in proportion to the activity of a business. ...
In economics and finance, marginal cost is the change in total cost that arises when the quantity produced (or purchased) changes by one unit. ...
In economics and finance, marginal cost is the change in total cost that arises when the quantity produced (or purchased) changes by one unit. ...
In this example, the marginal cost equals the extra amount of money spent on seed divided by the extra amount of crop produced, while average cost is the total amount of money spent on seeds divided by the total amount of crop produced. In economics and finance, marginal cost is the change in total cost that arises when the quantity produced (or purchased) changes by one unit. ...
Marginal cost is a term in economics. ...
Cost can also be measured in terms of opportunity cost. Opportunity cost is a term used in economics to mean the cost of something in terms of an opportunity forgone (and the benefits that could be received from that opportunity), or the most valuable forgone alternative. ...
Note that the marginal returns discussed in this article refer to cases when only one of many inputs is increased (for example, the quantity of seed increases), but the amount of land remains constant. If all inputs are increased in proportion, the result is generally constant or increased output. (Cf. Economies of scale.) In economics, returns to scale and economies of scale are terms that are related, and sometimes incorrectly used interchangeably. ...
...
History The concept of diminishing returns can be traced back to the concerns of early economists such as Thomas Malthus and David Ricardo. Both men, who lived in 19th century England, were worried that land, a factor of production in limited supply, would lead to diminishing returns. In order to increase output from agriculture, farmers would have to farm less fertile land or farm existing land with more intensive production methods. In both cases, the returns from agriculture would diminish over time, causing Malthus and Ricardo to predict population would outstrip the capacity of land to produce, causing a Malthusian catastrophe. (Case & Fair, 1999: 790). The Rev. ...
David Ricardo (April 18, 1772 – September 11, 1823), a British political economist, is often credited with systematizing economics, and was one of the most influential of the classical economists. ...
Alternative meaning: Nineteenth Century (periodical) (18th century — 19th century — 20th century — more centuries) As a means of recording the passage of time, the 19th century was that century which lasted from 1801-1900 in the sense of the Gregorian calendar. ...
Royal motto (French): Dieu et mon droit (Translated: God and my right) Englands location within the British Isles Official language English de facto Capital London de facto Largest city London Area – Total Ranked 1st UK 130,395 km² Population – Total (mid-2004) – Total (2001 Census) – Density Ranked 1st UK...
A Malthusian catastrophe, sometimes known as a Malthusian check, Malthusian crisis, Malthusian dilemma, Malthusian disaster or Malthusian trap, is a return to subsistence-level conditions as a result of agricultural (or, in later formulations, economic) production being eventually outstripped by growth in population. ...
References - Case, Karl E. & Fair, Ray C. (1999). Principles of Economics (5th ed.). Prentice-Hall. ISBN 0-13-961905-4.
See also |
Feeds |
Contact