Relevance of the law of diminishing returns, Managerial Economics

Relevance of The Law of Diminishing Returns

The law of diminishing returns is important in that it is seen to operate in practical situations where its conditions are fulfilled.  Thus, in a number of developing countries with peasant agricultural economies populations are increasing rapidly on relatively fixed land, and with unchanging traditional methods of production.  Consequently, productivity in terms of output per head is declining, and in some cases total productivity is falling.

Also the law of diminishing returns is important in the short run.  The aim of the firm is to maximize profits.  This happens when the firm is in a state of least-cost-factor-combination.  This is achieved when the firm maximises the productivity of its most expensive factor of production.  Productivity is measured in terms of output per unit of the factor.  Thus, if the variable factor is the most expensive factor, the firm should employ the variable factor until APP is at the maximum.  If the fixed factor is most expensive the firm should employ the variable factor up to the level when TPP is at maximum.

Posted Date: 11/27/2012 7:19:36 AM | Location : United States







Related Discussions:- Relevance of the law of diminishing returns, Assignment Help, Ask Question on Relevance of the law of diminishing returns, Get Answer, Expert's Help, Relevance of the law of diminishing returns Discussions

Write discussion on Relevance of the law of diminishing returns
Your posts are moderated
Related Questions

a) A country should always protect its domestic industries. Discuss. b) To what extent can a country actually rely on the principle of Comparative Advantage before engaging


structure of managerial economics

The Mixed Economy There are no economies in the world which are entirely 'market' or planned, all will contain elements of both systems. The degree of mix in any one econom


Marginal Revenue Marginal revenue is the additional revenue an organization receives resulting from the sale of one more item of output. Marginal revenue is calculated by takin


Ask questiHow does economic theory contribute to managerial decisions? on #Minimum 100 words accepted#

if market demand is Q= 30 - 3P how do you write the marginal revenue function as a function of Q