The law of diminishing returns is a simple, yet fundamental concept in economics. When the producer of a good wishes to expand its output, in the short-run it may do so by employing more workers or having its existing workers work longer hours. To acquire more capital and technology or to build new factories takes time and money, thus we say that in the short-run, a firm’s plant size is fixed; the only variable resource is labor.
But to what extent can production increase when only the amount of labor employed can change? This video lesson explains the principle of diminishing marginal returns, which says that as additional units of a variable resource (labor) are added to a fixed resource (capital), beyond a certain point the output attributable to additional units of the variable resource will decline. With only a limited supply of technology at their disposal, workers in a factory can only increase their productivity to an extent.
If a firm wishes to expand its production in the long-run, it must acquire more capital in order to allows for continued increases in the productivity of labor. This video will illustrate, using a toy truck factory employing tools and labor, the principle of diminishing marginal returns.
For some lesson ideas and blog posts on Diminishing Returns, check out this page from my blog: Economics in Plain English – the Law of Diminishing Marginal Returns