Can you please explain the law of diminishing returns?

The law of diminishing returns refers to our production function in the short run. Remember, we define the short run as when we have at least on factor of production that is fixed. The easiest, and typical example to work with here, is that we consider labour to be a variable factor, and land and capital to be fixed. Consider repeatedly adding more labour; at one point, the marginal product of labour will fall- this is because the equipment is being diluted among more workers, and therefore each worker will be less efficient. This therefore means there will be lower returns from adding another worker; we're experiencing diminishing returns! This is all shown through the marginal cost curve. Now knowing the shape of our marginal cost curve, we can also add our average variable cost, and average cost curves. 

Answered by Emily H. Economics tutor

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