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LOSS LEADER: Products sold below cost by a retail store in an attempt to attract buyers who are likely to buy other, more expensive, stuff. Stores are very fond of advertising and even selling popular products at very low prices. However, they hope that once customers have seen fit to enter their stores, then the suckers, er, customers will decide to buy other products that aren't so popular or so low priced. These popular, low-priced products are loss leaders. Sure the store loses profit on the products, but they make up these loses on other stuff.

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INCREASING MARGINAL RETURNS:

In the short-run production by a firm, an increase in the variable input results in an increase in the marginal product of the variable input. Increasing marginal returns typically surface when the first few quantities of a variable input are added to a fixed input. This is one of two alternatives for marginal returns. The other is decreasing marginal returns. A related phenomenon for long-run production is increasing returns to scale.
Increasing marginal returns occurs when the addition of a variable input (like labor) to a fixed input (like capital) enables the variable input to be more productive. In other words, two workers are more than twice as productive as one worker and four workers are more than twice as productive as two workers. Increasing marginal returns means that the marginal product of the variable input increases.

How about an example to illustrate increasing marginal returns? Suppose that Flex-Star Plaque Company produces the wildly popular Flex-Star Interactive Trophy Plaque (the wall plaque that broadcasts accomplishments to any who pass by). The Flex-Star factory, located on the outskirts of Shady Valley, is filled with the machinery, tools, and equipment needed to produce Interactive Trophy Plaques. All that is needed are the workers.

In the short run, the productive capital, the Flex-Star factory and related equipment, is fixed. This provides Flex-Star with a potentially perplexing situation. The plant itself cannot produce Interactive Trophy Plaques without equipment-operating workers.

  • The first step is to add a worker, call him Dan. While Dan, by himself, can certainly produce more Interactive Trophy Plaques than an empty factory, Trophy-Plaque production requires a wide assortment of tasks that are bound to make Dan's all-encompassing job exceptionally difficult. Dan cuts and sands the wood, adds the fancy lettering, applies the varnish, polishes the metallic-looking plastic figurine, programs and installs the voice modulator, adds the mechanical vibrating flags, then packs it all up and ships it out. WHEW! Take a breather, Dan.

    Being the only worker in this factory means that Dan must do everything. Dan must be the wood cutter, the voice modulator programmer, the metallic-looking plastic figurine polisher, and the packer and shipper. Dan needs help.


  • A second worker (Deanna) should be helpful. With two workers, Dan and Deanna can divide the assorted Trophy Plaque production tasks. Dan can do the wood cutting and Deanna can do the sanding. Dan can polish the metallic-looking plastic figurine and Deanna can program the voice modulator. By dividing these tasks, Dan and Deanna can both be more productive than Dan is alone. Doing everything, Dan might be able to fabricate 5 plaques an hour. But dividing the work, each concentrating on half of the tasks, Dan and Deanna can fabricate 15 plaques an hour.

  • If a third worker is added, that would be Doug, then all three workers can further divide the tasks. Doing so means the capital in the Flex-Star factory is being used more effectively. And this means that the productivity of the workers rise. Together, Dan, Deanna, and Doug might be able to produce something like 30 plaques per hour.

  • Adding a fourth (Debra), fifth (Donnie), and sixth (Duncan) workers, makes it possible to use the capital that comprises the Flex-Star factory even more effectively. And when the capital is used more effectively, the workers are more productive.
The end result is increasing marginal returns. In other words, the marginal product of each worker is greater than the previous worker. This is what creates the upward-sloping segment of the marginal product curve.

<= INCREASING-COST INDUSTRYINCREASING RETURNS TO SCALE =>


Recommended Citation:

INCREASING MARGINAL RETURNS, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2020. [Accessed: April 4, 2020].


Check Out These Related Terms...

     | law of diminishing marginal returns | marginal returns | decreasing marginal returns | production inputs | production function | production time periods | total product | average product | production stages |


Or For A Little Background...

     | short-run production analysis | marginal product | long run, microeconomics | short run, microeconomics | fixed input | variable input | product | production | production cost | variables | labor | capital | law of supply | supply | supply price | quantity supplied | principle | business | economic analysis | marginal analysis | factors of production | microeconomics | market |


And For Further Study...

     | long-run production analysis | law of diminishing marginal utility | marginal utility | division of labor | production possibilities | law of increasing opportunity cost | total product and marginal product | total product and average product | average product and marginal product | returns to scale | marginal productivity theory | marginal cost | marginal revenue product |


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