Final answer:
The concept of diminishing returns becomes significant in short-run production, where fixed capital limits the additional output from more labor. This is reflected in the Law of Diminishing Marginal Product, which shows that each new worker adds less to total output than the previous one, due to the fixed capital.
Step-by-step explanation:
The concept of diminishing returns first becomes significant at the stage of short-run production. This phenomenon is often referred to as the Law of Diminishing Marginal Product. It occurs because in the short run, certain factors, such as capital, are fixed and cannot be altered to accommodate the increasing number of workers. As more labor is added, the marginal product of labor may initially increase, but it will eventually decrease, meaning that each additional worker contributes less output than the previous one. This is due to the limitations of the fixed capital which cannot be changed to support the extra workers efficiently.
For example, with a two-person saw, adding a third worker might result in marginal tasks such as oiling the saw or providing water, but as more workers join, the benefits diminish as there's simply not enough productive work that can be done with the fixed amount of capital. Consequently, the marginal product begins to fall, and total production eventually increases at a decreasing rate. This principle is mathematically represented as MP = ΔTP/ΔL, where MP stands for marginal product, ΔTP is the change in total product, and ΔL is the change in labor.