The law of diminishing returns only applies in the Short Run, when only one factor of production is variable and can be increased. The other factors of production are fixed. Thus as the variable factor of production is increased the marginal product of that factor will rise at first, but will at some point begin to fall. Returns to scale can only occur when no factors of production are fixed. If the quantities of all …
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showed last 75 words of 872 total
…both to increase output, and both can lead to unwanted negative effects, if taken too far. However, a firm can maximise its profits after the marginal product of the variable factor has started to fall, as long as employing the additional factor of production adds more to the firms' total revenue than it does to costs. If a firm is experiencing decreasing returns to scale, on the other hand, it is no longer maximising profits.