The Firm Faces Diminishing Returns in the Short Run

• In the short run, the firm is subject to diminishing marginal returns from labor. The change in output from one additional worker decreases as the number of workers increases.

PRINCIPLE of Diminishing ReturnsSuppose that output is produced with two or more inputs and that we increase one input while holding the other inputs fixed. Beyond some point—called the point of diminishing returns—output will increase at a decreasing rate.

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