MICROECONOMICS-1

TANISHA ARYA
23508033
BBE SEM-1
THE LAW OF DIMINISHING RETURNS
The law of diminishing returns operates in the short run when we can’t change all the
factors of production. Further, it studies the change in output by varying the quantity
of one input.
Technically, the law states that as we increase the quantity of one input which is
combined with other fixed inputs, the marginal physical productivity of the variable
input must eventually decline.
In simpler words, the total productivity, for a given state of technology, is bound to
increase with an increase in the quantity of a variable input. However, as the quantity
of the inputs keeps on increasing, the marginal product rises to a maximum, then starts
to decline and eventually becomes negative.
This is because the crowding of inputs eventually leads to a negative impact on the
output.
RETURNS TO SCALE
Returns to scale refer to the change in output that results from
a change in the factor inputs simultaneously in the same
proportion in the long run. Simply put, when a firm changes the
quantity of all inputs in the long run, it changes the scale of
production for the goods.
 DIMINISHING RETURNS TO A SINGLE FACTOR AND
CONSTANT RETURNS TO SCALE ARE INCONSISTENT

Diminishing returns to a single factor and

constant returns to scale are not inherently
inconsistent concepts. In fact, they can
coexist under certain conditions.
Diminishing returns to a single factor typically applies in the short run when at least
one factor of production is fixed, and increasing a variable factor eventually leads to
diminishing marginal returns. This concept doesn't imply anything about the scale of
production as a whole, but rather focuses on the impact of increasing a specific input.
Constant returns to scale, on the other hand, applies to the long run and involves
changing the scale of all inputs simultaneously. If doubling all inputs results in a
doubling of output, a firm is said to exhibit constant returns to scale.
CONCLUSION
The coexistence of these concepts can be explained by considering a
scenario where there are diminishing returns to a single factor (e.g.,
labor) in the short run, but in the long run, the firm can adjust all factors
of production (including capital) proportionally to maintain constant
returns to scale. In this way, the diminishing returns to the individual
factor are offset by the flexibility to adjust other factors in the long run.
It's important to note that these concepts are often applied in different
timeframes and contexts. Diminishing returns to a single factor is
associated with short-run analysis, while constant returns to scale is
more relevant to long-run considerations. Therefore, they are not
contradictory but rather describe different aspects of the production
process at different time scales.