Final answer:
The law of diminishing returns states that the marginal benefit of additional resources decreases. It applies to the short run, but not the long run. Understanding this law helps with resource allocation decisions.
Step-by-step explanation:
The law of diminishing returns states that as additional increments of resources are added to a certain purpose, the marginal benefit from those additional increments will decline. For example, if a company keeps hiring more workers to produce a good, at some point the additional workers will contribute less and less to the output, resulting in a decline in overall productivity.
This law applies to the short run because it assumes that at least one factor of production is fixed. In the long run, however, all factors of production can be modified, which can lead to a different outcome and the potential for increasing returns to scale.
Overall, understanding the law of diminishing returns helps businesses and governments make decisions about resource allocation and production optimization.