The short run, the long run and diminishing returns

Overview

Short run and the long run in production, law of diminishing returns and increasing returns to a variable factor.

What you need to know

Answer each one before you reveal it.

Questions from this subtopic

Each one with the model answer underneath.

1. 1

   Distinguish between the short run and the long run in production.

   Model answer

   The short run is the period in which at least one factor of production is fixed. The long run is the period in which every factor can be varied.

2. 2

   Why is the short run defined by a fixed factor rather than by a length of time?

   Model answer

   The time needed to vary all factors differs between industries. A steelworks takes years to expand capacity while a market stall can do so in a day.

3. 3

   State the law of diminishing returns.

   Model answer

   The law of diminishing returns says that adding a variable factor to a fixed factor eventually lowers marginal product. Each extra worker adds less to output than the one before.

4. 4

   Why is the law of diminishing returns a short run law?

   Model answer

   The law of diminishing returns requires at least one factor to be fixed in supply. Every factor can be increased in the long run, so the law does not apply there.

5. 5

   Explain why diminishing returns eventually set in.

   Model answer

   Extra workers must share the same fixed quantity of machinery and floor space. Each additional worker therefore has less capital to work with and adds less output.

6. 6

   Do diminishing returns set in immediately?

   Model answer

   Diminishing returns may not set in immediately, because the first few extra workers allow specialisation. Marginal product often rises at first and falls only once the fixed factor becomes crowded.

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