5 Steps to a 5 AP Microeconomics, 2014-2015 Edition

Law of Diminishing Marginal Returns

Imagine what happens to the lemonade stand as Molly adds more and more workers. At first,

tasks are divided. (For example, Josh squeezes the lemons; Molly adds the sugar; Kelli stirs.)

Specialization occurs. The marginal productivity of successive workers is rising in the early

stage of production, but at some point, adding more workers increases the total product by

a lesser amount. Maybe the fourth worker is pouring the lemonade and stocking while the

fifth is taking money and making change. Beyond the fifth worker, the table is too crowded

with employees, cups are spilled, product is wasted, and total production actually falls.

The marginal contribution of these workers is negative. This illustrates one of the most

important production concepts in the short run, the law of diminishing marginal returns,

which states that as successive units of a variable resource are added to a fixed resource, beyond

some point the marginal product falls.

Graphically Speaking

Marginal product is the incremental change in total product as one more unit of labor is

added. Marginal product is the geometric slope of total product. In Figure 8.1, the total

product curve is initially getting steeper as more labor is added. This is seen in Figure 8.2

as increasing marginal product. From the third to the fifth worker, the slope of total prod-

uct is still positive, but it is becoming less steep. In Figure 8.2 marginal product from

workers 3 to 5 is still positive but is falling. Beyond the fifth worker, total product is falling

and thus has a negative slope. This turn of events is seen below when marginal product

becomes negative.

Average product, also plotted below, initially rises, reaches a peak, and then begins to

fall. So long as the marginal (next) worker adds production that is above the current aver-

age, they are pulling the average up. This is why we see APLrising so long as MPLis above

APL. If the marginal worker adds production that is below the current average, the worker

pulls the average down. Thus, when MPLis below APL, you see that APLis falling. Logically

then, MPLintersects APLat the peak of APL. Average product cannot be negative.

• Increasing marginal returns: MPLincreases as L increases.


• Diminishing marginal returns: MPLdecreases as L increases.


• Negative marginal returns: MPLbecomes negative as L increases.

106 › Step 4. Review the Knowledge You Need to Score High

Total Product (TPL)

0

10

20

30

40

50

01234567

Labor

Cups per Day

Figure 8.1

As Molly employs more workers to the fixed plant capacity (the table on the corner),

total product increases, eventually peaks, and then begins to fall. This production

function can be seen in Figure 8.1.

“An important

principle to know

and understand.”

—AP Teacher

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