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Diminishing Returns and Returns to Scale

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What is the difference between diminishing returns and returns to scale. How does each affect the behaviour of average costs?

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The solution discusses what is the difference between diminishing returns and returns to scale.

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In economics, diminishing returns is the short form of diminishing marginal returns, which means that as more of an input is applied, each additional unit produces less and less additional output.

The law of diminishing returns states that as we add more units of a variable input (i.e. labour) 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 starts to fall. This means that total output will increase at a ...

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