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Can you please explain?

I don't understand how increased capital can lead to smaller and smaller gains in output.

Asked by Burleigh, Last updated: Nov 28, 2021

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John Smith

John Smith

John Smith
John Smith

Answered Sep 08, 2016

The concept is known as the law of diminishing returns. microeconomic theoryshows that when increasing amounts of a variable factor of production are applied to afixed factor of production, at some point each additional unit of the variable factor willproduce less than the previous unit. for example, if the variable factor is labour andthe fixed factor is machinery, the more people you add to your workforce, the lessproduction per each additional person will be realized. to take an extreme example,the more you cram your factory full of people, the more they get in the way of eachother and the less productive they are. the same holds true if machinery andequipment are the variable factor and labour is fixed. increases in both can lead tomore production which is why an increase in savings can help take production to ahigher level, but then you reach a higher level at which the returns per worker or permachine diminish. in theory, growth is really sustained and is expanded bytechnological development and not by adding more labour and more of the samemachines for production.
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