Thursday  January 26, 2023
 AmosWEB means Economics with a Touch of Whimsy!
 NOBEL PRIZE IN ECONOMIC SCIENCES: An award given annually since 1969 to an economist or scholar in recognition of a major contribution to the study of economics. It was established by the Bank of Sweden and is annually awarded by the Royal Swedish Academy of Sciences in Stockholm. The official name of the award is The Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel. It is the only Nobel Prize awarded for a social science. The first Nobel Prize in Economic Sciences was awarded in 1969 to Ragnar Frisch and Jan Tinbergen.

MARGINAL RETURNS:

The change in the quantity of total product resulting from a unit change in a variable input, holding all other inputs fixed. Marginal returns is an older and more generic term for marginal product. While marginal product has largely replaced marginal returns in most discussions of short-run production, the phrase does persist in a few terms like the law of diminishing marginal returns.
Marginal returns can either increase and decrease. Increasing marginal returns mean that marginal product is greater for each subsequent unit of a variable input than it was for the previous unit. Decreasing marginal returns, as such, mean that marginal product is less for each subsequent unit of a variable input than it was for the previous unit.

### Two Returns

Marginal returns can either increase or decrease.
• Increasing Marginal Returns: Increasing marginal returns occurs during the course of short-run production by a firm if 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.

• Decreasing Marginal Returns: Decreasing marginal returns results with short-run production if an increase in the variable input results in a decrease in the marginal product of the variable input. Decreasing marginal returns usually emerge only after the first few quantities of a variable input are added to a fixed input and persist throughout production.

### A Big, Empty Factory

How about an example to illustrate marginal returns? Suppose that OmniMotors is producing the wildly popular OmniMotors XL GT 9000 Sports Coupe in its two-million square foot OmniMotors assembly plant located on the outskirts of Shady Valley. This OmniMotors assembly plant is filled with the machinery, tools, and equipment needed to produce XL GT 9000 Sports Coupes. In the short run, this capital, the OmniMotors assembly plant and related equipment, is fixed. To produce cars, OmniMotors needs workers. The vast size of this plant, means that OmniMotors can easily provide separate productive tasks (installing engines, painting the exterior, checking the horn) for several thousand workers.

### First, Increasing Marginal Returns

What happens when workers are added? The first few hundred workers hired by OmniMotors are bound to make increasingly more effective use of this enormous plant. If OmniMotors employs only a dozen or so workers, each performs a wide range of unrelated tasks using a wide range of capital equipment. On a given day, one worker might spend time at the engine installation work-station to install an engine, then move off to the painting room to paint the exterior, then amble over to the hood-ornament polishing position to polish the hood ornament, then dash off to horn-testing area to honk the horn.

A relatively small contingent of labor is not able to effectively use the fixed capital. This means that each additional worker employed can use the capital more effectively. Each worker can concentrate on a specific task. This gives rise to increasing marginal returns, increasing marginal product, and the upward-sloping segment of the marginal product curve.

### Next, Decreasing Marginal Returns

However, as the workforce continues to expand, the capacity of the fixed capital is approached. Workers have to share the equipment and substitute for each other on lunch and coffee breaks. Some workers might do nothing but assist other workers. While the efforts of these extra workers does increase total production, the incremental increase declines for each one. This gives rise to decreasing marginal returns, decreasing marginal product, and the downward-sloping segment of the marginal product curve.

Most important, decreasing marginal returns is a reflection of the key principle underlying the study of short-run production--the law of diminishing marginal returns.

 <= MARGINAL PROPENSITY TO SAVE MARGINAL REVENUE =>

Recommended Citation:

MARGINAL RETURNS, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2023. [Accessed: January 26, 2023].

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