Final answer:
The Law of Diminishing Marginal Product describes how, after an initial increase in productivity due to additional workers, a firm will experience a decline in marginal productivity with each new worker added because of fixed capital. Eventually, this can even lead to negative returns if too many workers crowd the production process. In the long run, with variable factors, a firm can optimize production to avoid diminishing returns.
Step-by-step explanation:
The concept at hand is the Law of Diminishing Marginal Product, which is a fundamental principle in the field of economics, specifically in the context of production. In the short run, a firm can experience an increase in production when additional workers are hired, due to the higher marginal product of earlier workers particularly when using capital more efficiently (like two workers using a two-person saw). However, as more workers are added, there is a point where the marginal product begins to decline; this point signifies the onset of diminishing marginal productivity. This phenomenon mainly occurs because of fixed capital: for example, no matter how many workers are added, the number of saws remains constant and only a certain number of workers can use them efficiently.
When too many workers are involved, they might interfere with each other's work, leading to less output per additional worker, or even a reduction in total output. This occurrence can be observed in three stages: initially increasing marginal returns, then diminishing marginal returns, and eventually negative returns if too many workers are hired. It's important for firms to balance the number of workers with the capital available to achieve maximum efficiency.
In the long run, given that all factors are variable, a firm can adjust capital levels and find the most efficient way to produce a certain level of output, thus avoiding the trap of diminishing productivity seen in the short run.