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Diminishing Returns

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Discuss the concept of the law of "diminishing returns" and why does it occur only in the short run? Differentiate between "the long run return to scale" and "economies of scale."

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Sometimes also referred to as the law of variable proportions, this "law" is really a generalization economists make about the nature of technology when it is possible to combine the same factors of production in a number of different proportions to make the same product. The law states:

When increasing amounts of one factor of production are employed in production along with a fixed amount of some other production factor, after some point, the resulting increases in output of product become smaller and smaller.

(That is, first the marginal returns to successive small increases in the variable factor of production turn ...

Solution Summary

This solution discusses the concept of the law of "diminishing returns" and why it occurs only in the short run.

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