Question

Why does a business often reach a point at which adding more resources does not increase productivity or profits at the same rate it used to? (diminishing returns, stages of production)

Answer 1

Businesses experience diminishing returns when added resources no longer proportionally increase output or profits, which is explained by the Law of Diminishing Marginal Product. The production process is categorized into three stages: increasing returns, diminishing returns, and negative returns, as the number of workers increases.

Step-by-step explanation:

A business often reaches a point where adding more resources does not increase productivity or profits at the same rate due to the Law of Diminishing Marginal Product. This occurs because production utilizes fixed capital, and after a certain point, each additional unit of labor contributes less to overall output. There are three stages of production:

Stage 1: Increasing returns as each new worker adds more to output than the previous, but there are not enough workers to use all machinery efficiently.

Stage 2: Output continues to rise but at diminishing rates, indicating diminishing returns, as workers may have to perform non-productive tasks like stocking shelves.

Stage 3: With too many workers, production reaches negative returns, where the marginal output can decrease, causing total factory output to also fall.

This concept is analogous to diminishing marginal utility seen in consumer choice, which both fall under the broader concept of diminishing marginal returns. Factors like capital deepening can result in diminished returns without technological innovations that shift the production function curve. However, in high-income economies, this can be offset by continuous technological innovation and a conducive economic climate.

Answer 2

diminishing returns

Step-by-step explanation:

Diminishing returns are based on the economic concepts founded on the law of diminishing marginal returns. This law provides that after some optimal production level is achieved, the continuous addition of input will lead to a decreased output rate.

Diminishing returns is when productivity increases at a decreasing rate as more input are used while holding other factors constant. Once productivity arising from an input hits its peak, additional employment of that resource will result in a decreased or negative productivity. For example, if input labor is added to a factory, new workers will improve productivity until the factory reaches its maximum capacity. Hiring more workers after the factor hits its peak will result in a decline in labor productivity.