The Law of Diminishing Returns in the Short Run

In economics, the law of diminishing returns states that as more units of a variable input are added to a fixed input, the marginal product of the variable input will eventually decrease. This means that the additional output generated by each additional unit of the variable input will become smaller and smaller.

The law of diminishing returns primarily applies to the short run, which is a period of time in which at least one input is fixed and cannot be changed. In the short run, firms have limited flexibility in adjusting their production levels due to fixed inputs such as capital or land.

Key Points:
- The law of diminishing returns is a short-run concept that assumes at least one input is fixed.
- It states that as more units of a variable input are added, the marginal product of that input will eventually decrease.
- The law of diminishing returns does not apply to the long run, in which all inputs are variable.

Example:
To understand this concept better, let's consider an example. Imagine a bakery that produces cakes. The bakery has a fixed amount of baking ovens and a variable amount of labor. In the short run, the number of ovens is fixed, so the bakery can only increase its production by hiring more workers.

Initially, when the bakery hires more workers, the production output increases at an increasing rate. This is because the workers can work more efficiently with the available ovens, leading to higher productivity. However, at some point, adding more workers starts to have diminishing returns.

Graphical Representation:
Graphically, the law of diminishing returns is represented by a downward-sloping marginal product curve. The curve initially increases steeply, reaches a peak, and then starts to decline. This decline indicates that the marginal product of the variable input is decreasing.

Long Run vs. Short Run:
While the law of diminishing returns applies to the short run, it does not hold in the long run. In the long run, all inputs are variable, and firms have the flexibility to adjust their production levels by changing the quantities of all inputs.

In the long run, firms can overcome the diminishing returns by investing in additional fixed inputs, such as purchasing more ovens or expanding their facilities. By increasing the capacity of fixed inputs, firms can continue to increase their production without experiencing diminishing returns.

Therefore, the correct answer to the question is option 'A' - the law of diminishing returns applies to the short run, but not the long run.