Two Returns

• 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

First, Increasing Marginal Returns

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.