Law of Diminishing Marginal Returns
Supply
AO2·HL
Syllabus requirement
As more units of a variable input are added to a fixed input, the marginal product of the variable input eventually decreases.
Assessment objectives
AO2 Application and Analysis
Higher LevelThis topic is assessed at HL.
Summary
The law of diminishing marginal returns (DMR) explains how, in the short run when at least one factor of production is fixed, adding more units of a variable input (for example, labour) eventually raises output by smaller increments. It shows that firms may experience initially increasing marginal returns but then falling marginal returns, which raises marginal costs and affects production decisions. This concept is important for understanding short-run production, costs and why firms need higher prices to expand output when inputs become less productive.
